So writes Steve Mauzy (www.wyattresearch.com) in edited excerpts from his original article* entitled Read This If You’re Worried About Gold.
[The following article is presented by Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com and www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Mauzy goes on to say in further edited excerpts:
First, it’s important to understand gold. Gold is not an investment; it’s not a commodity. Gold is a store of value, and that’s the way it should be viewed. From a portfolio perspective, dollars are allocated to gold to maintain long-term purchasing power.
Gold has been a store of value…[for] centuries so, despite the short-term price decline, gold, in my opinion, is still good. I say that because Western countries are awash with debt: the United States’ debt-to-GDP ratio stands at 73%, the United Kingdom’s ratio stands at 89%, Germany’s stands at 82% and France’s stands at 90%. Japan’s ratio stands at an unconscionable – and unsustainable – 214%. Much of this government debt has worked its way onto central-bank balance sheets. The central banks purchase this debt with newly issued money; thus we have record levels of money circulating through the economy.
The graph below, constructed by the St. Louis Federal Reserve Bank, shows the surge in currency and demand-deposit (known as M1) stock in recent years.
Each new dollar that enters the economy reduces the purchasing power of the dollars outstanding. This is an easy concept to grasp. If there are a billion dollars circulating through the economy one day and the central bank doubles the amount to two billion dollars the next day, what cost $1 one day will cost $2 the next, holding all other variables constant.
In the real world, of course, all variables aren’t held constant, so the relationship between price increases and money supply is less direct. Many other variables – such as demand, supply, productivity, money flow – also figure into price but over the long haul, prices rise with a rising money supply. Also over the long haul, gold prices rise with both monetary and consumer-price inflation.
Compare the graph of money supply above with the graph of gold prices below. The overlay between money supply and gold prices isn’t perfect, but over time the trend and the correlation hold.
Admittedly, Western governments could begin to balance their budgets and return to sound money practices. In that case, gold would lose its utility as a store of value against the dollar, the euro and the yen but what are the odds of that occurring?
Spending garners votes. If you can spend with impunity, which every politician does, why stop? You don’t, which is why deficit spending in the United States is expected to remain above $1 trillion indefinitely.
Concurrently, the Federal Reserve is unlikely to throttle back on QE3, at least this year, especially when you factor in real gross domestic product growth, which was unexpectedly revised down this week to 1.8% from 2.4% for the first quarter.
Moreover, if the Fed were to remove or reduce money growth, the free market would once again dictate bond yields and stock prices and there is a very high probability the bond yields and stock prices that prevail today wouldn’t prevail tomorrow.
Yes, gold is good. That is, it’s a good long-term store of value, and will remain one for the future. That said, gold could still be a bad short-term trade so buy gold with an eye on the distant horizon, not the tip of your nose.
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
*http://www.wyattresearch.com/article/as-good-as-gold-but-is-gold-still-good/30001 (© 2013 Wyatt Investment Research & Business Financial Publishing LLC)
I am now bearish on gold because the bulls are bullish for all the wrong reasons, and the price action is supporting my position. In my opinion, gold is being supported by pillars of sand – 19 in total – and the tide is coming in. Read More »
Roubini expects gold will fall below $1,000/oz, taking prices down to approximately 30% from current levels; a point not seen since 2007. Here’s why. Read More »
Surely, the swift and severe plunge in gold represents a buying opportunity, right? Igold-correction mean, it’s not like the Fed finally stopped printing money, right? Wrong! As the old saying goes, “never try to catch a falling knife” and that’s especially true in the case of gold. Below are 3 fundamental forces working against gold prices and, combined, they could ultimately push the precious metal down another 25% from here. Read More »
Gold may be set to nearly double from current levels, but it didn’t drop in a straight line and it won’t return to (and surpass) its previous highs in a straight line, either. For now let’s watch and wait to see if it overshoots. If you own gold, you can stay put but if you’re looking to add to or initiate a position here, my suggestion is to do nothing and to get ready to buy when the time is right… Read More »
This ten minute interview with Eric Sprott is excellent and worth your time. He makes the best case I have heard or read recently about why the financial fundamentals are so good for precious metals…both physical gold and silver and the good mining stocks. It is really worth listening to. Read More »
No one has a crystal ball and I certainly don’t claim to have one. [Nevertheless,] I strongly believe that the prices we see today in gold and silver will be looked back upon in the next few years as a great buying opportunity. The data I read and understand tells me the case for gold and silver is now a strong one…If you are conservative dollar cost average into a position for a long time now [otherwise] I am OK with a full allocation into gold and silver at this point in time… Read More »
A more aggressive devaluation of paper currencies is on the horizon thus the whole PM Complex is completely underpriced. Averaging in from this point on seems warranted. Below is a full explanation as to why that is the case. Read More »
The historical record shows that those who get washed out during big corrections miss the greatest buying opportunities of a bull market. With that as context, what can we expect from gold moving forward? Let’s start with the short term. Read More »
This article presents the key highlights in Ronald Stoeferle’s 7th edition of “In GOLD We TRUST” in which he takes an holistic view on the latest developments in the gold market laying out the fundamental arguments why the gold bull market remains intact and concluding, based on conservative assumptions, that the long-term price target for gold is $2,230. Read More »
It’s been a tough road for precious metals but the path ahead has strong potential of being significantly profitable and in a short period of time. The buying opportunity that we’ve spoken of for months could be days away. When precious metals equities rebound, they rebound violently. Read More »