Let’s take a roll call of the Who’s Who of Finance and see where they stand vis-à-vis gold or concepts that would be conducive for gold going up.

  • Paul Volcker: His op-ed piece in the Washington Post actually stating the “C” word. He talks about a “financial crisis” possibly if Washington doesn’t get its act together. The title of his article; An Economy on Thin Ice
  • Warren Buffet: The smartest investor of all time. He is short the dollar
  • David Dreman: Famous value manager who manages $11 billion, recently stated on Bloomberg “Bonds are almost suicidal”.
  • Bill Gross: Head of the world’s largest bond management company ($464 billion), has warned of the dire consequences of U.S. monetary and economic policies.

The above people are not gold bugs; they are part of the heart and soul of the establishment of global investments and economics. They know that something has to give. They know that past and present economic policies are beyond reason and that a terrible economic accident or a powerful inflationary period is surely coming to the western world. Either scenario means gold is going to be a very important asset class to own – and if gold is good then mining stocks will be even better.

Inflation in the U.S is 3.5% and rising. Globally this number is 4.3%. If the inflation numbers continue then just a small amount of investors buying gold could have a dramatic effect on the price. With U.S. household’s time deposits and savings accounts at $4.3 trillion, it would require only 1/2 of 1% of this money purchasing gold to create a substantial (1,574 tonne) demand imbalance (more than half the world’s annual mine supply). Stock ownership, mutual funds and life insurance/pension reserves of U.S households equals another $20.8 trillion. Again only a 1/2 of 1% allocation to gold would create a demand that would be 3x annual mine output.

My investment management firm monitors 61 foreign countries that report regularly on money supply statistics. In the last 12 months these 61 foreign countries have increased their basic money supplies by an average of 15.2%. Most people with savings in these countries will try and protect themselves from inflation that is surely looming and will most likely be buying gold. The Chinese basic money supply from 1998 has averaged an annual increase of 13% for 7 solid years. Inflation is coming to China – and that means plenty of gold buying.

Also if the Chinese revalue the RMB, the very next day after a 5-10% revaluation (and this could be very soon) every Chinese saver will be able to go out and buy 5-10% more gold for the exact amount of cash from the day before. The revaluation of the RMB should be very positive for the bullion market. Also if the RMB floats, U.S. dollars held by foreign central banks could more easily be converted to RMB to cover trade with China and this would put even more pressure on the dollar.

In the U.S., record trade deficits are continuing at a $730 billion annual pace. Money leaving this country to buy goods has been essentially matched by that money coming back to this country to buy U.S. treasury bills and bonds. On the surface this doesn’t sound too bad and economists are saying this shows foreigners have confidence in the U.S. But this return of the money is not a commercial transaction for gain. It is foreign governments and investors owning debt that someday must be repaid. 6% of our entire economy annually is based on buying goods overseas and going into national debt to pay for it. Too much debt and too much money creation are bullish for gold.

The key reasons to accumulating a substantial position in the metal stocks in the coming years, especially the precious metals are logical and simple and are as follows:

  • More population: Up 50% globally since the last big run up in gold in 1980 equals
  • More low-to-middle ‘middle class’ people continuing to buy gold jewelry and this consumes more gold annually than mines produce,
  • Industrialization in Asia and India is a mega-trend favoring all commodities
  • Inflation in most countries is increasing and excessive money is being printed
  • Debt levels in the industrialized countries are at levels that are well beyond prudent limits – and the most important reason to have some gold assets is;
  • The Bank for International Settlements reports Exchange Traded Derivatives are now $279 trillion and OTC derivatives are now $220 trillion. This is $100 trillion more than when Warren Buffet declared them “economic time bombs”.

One does not have to be an economist to know that a basic conservative plan for wealth preservation and accumulation is now critical. Gold mining and related metal companies should be part of this plan. Investors should also stay away from long-term bonds.

=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=

Please visit our website at www.kengerbino.com for more articles on gold, stocks and the economy.

Ken Gerbino
3 May 2005