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The macro-economic conditions that
have supported gold's bull run over the past decade have not changed; in
fact, they've become progressively worse. This is the calm before the storm,
and last week's intra-day low of US$1,535 an ounce may well have been a
bottom.
Figure 1:
Currency Decline
 
In Europe, a good storm-watch
indicator is the Bloomberg Europe 500 Banks and Financial Services Index -
down around 35 percent over the last year. In the United States, according to
a recent interview with Lakshman Achuthan, COO of the Economic Cycle Research Institute
(ECRI), "The question is not whether there will be a [US] recession, but
when there will be a recession. We are very clearly on record for forecasting
a recession to start by the middle of this year."
Gold is universally under-owned by
everyone, including institutional portfolio and pension fund managers (Figure
2). Pension fund managers have a fiduciary responsibility to meet
liabilities. They use asset allocation to achieve diversification in order to
reduce risk, maximize performance and thus responsibly manage their funds. To
ignore the best-performing asset class year after year could conceivably
expose managers and trustees to legal liabilities (Figure 3).
Figure 3:
Precious Metals vs Indices
The traditional view is that three
asset classes (stocks, bonds and cash) are sufficient to achieve
diversification. But Figure 4 shows that only precious metals offer
negative correlation to stocks, bonds and cash; a portfolio that consists of
only positively correlated asset classes is not balanced or diversified.
Holding cash for portfolio protection
does not work either. Figure 5 shows the dismal performance of five
major currencies versus gold since 2001.
More funds and fund managers are now
stating that allocations between 5 percent and 10 percent to bullion are
prudent. Kevin O'Leary, Chairman of O'Leary Funds and star of ABC's Shark
Tank and CBC's Dragon's Den has owned gold for decades and
maintains a 5 percent weighting. When the price dips and his weighting drops,
he says he buys into weakness.
US-based Wainwright & Co.
Economics Inc. studied the allocation of gold required to protect against
inflation and found that "a US-equities portfolio in which 15 percent of
the assets are diverted to gold bullion would be effectively immune from
damage due to a rising gold price and that is, we believe, equivalent to
immunity from inflation."
Emerging market demand for gold
continues to grow, with China asserting a dominant role. The World Gold
Council reported that, for Q1 2012, China's gold demand was up 10 percent
year-over-year, despite a 22 percent increase in average prices. Inflation
concerns and government attempts to cool off the housing market continue to drive
Chinese gold demand and, before long, China will overtake India as the top
global gold consumer. Chinese demand for goods, services and, yes, gold, will
shape the global economic and investment environment for the balance of the
21st century.
Gold has been a store of value and
wealth preservation for more than 3,000 years, while ALL fiat
currencies have reverted to zero value after around 30 years. The clock is
ticking on the US dollar; it has been 41 years since President Richard Nixon
abandoned the gold standard in 1971.
In a recent Capitol Hill hearing,
Treasury Secretary Timothy Geithner was asked: If he could request just one
final debt ceiling increase, how much would it be? "It would be a
lot," he said. "It would make you uncomfortable." The Treasury
Department's own projections have US debt at $23 trillion by 2015 - a 64
percent increase to the current debt limit. Given gold's close correlation to
US government debt, a gold price in the $2,750 range in two to three years'
time seems to be a worst-case scenario. Now is the time to buy gold, not to
sell.
Fund managers, advisors and investors
must realize that not all bullion investments are created equal.
Uncompromised gold that offers liquidity, no counterparty risk, and allows unitholders to own their bullion outright is hard to
find, yet well worth the effort, particularly in an era of increasing risk to
the very foundations of the financial system.
Due to extensive and increasing risks
facing the global economy, gold is poised to proceed in its bull market to a
conceivable target of $10,000 an ounce - a topic I deal with at length in my
upcoming book to be published by John Wiley & Sons: $10,000 Gold:
The Inevitable Rise and Investor's Safe Haven. How best to participate in
the upside is open to debate, but we at BMG feel that ownership of
uncompromised bullion is the most reliable way of preserving wealth.
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