15 Fundamental Reasons to Own Gold

Here is one that I have dug up from my archives, just to show how apt, and how long this has been com­ming — the smart investors got on this phase back in 2002 and have been chug­ging ever since. John Embry from Sprott assett man­age­ment gives us 15 fun­dame ntal rea­sons for us to own gold (note that this arti­cle was writ­ten back in Sep­tem­ber 26 2003 — and it is just as informed as it was then):

1.Global Currency Debasement

The US dol­lar is fun­da­men­tal­ly & tech­ni­cal­ly very weak and should fall dra­mat­i­cal­ly. How­ev­er, oth­er coun­tries are very reluc­tant to see their cur­ren­cies appre­ci­ate and are resist­ing the fall of the US dol­lar. Thus, we are in the ear­ly stages of a mas­sive glob­al cur­ren­cy debase­ment which will see tan­gi­bles, and most par­tic­u­lar­ly gold, rise sig­nif­i­cant­ly in price.

2. Investment Demand for Gold is Accelerating

When the crowd rec­og­nizes what is unfold­ing, they will seek an alter­na­tive to paper cur­ren­cies and finan­cial assets and this will cre­ate an enor­mous invest­ment demand for gold. To facil­i­tate this demand, a num­ber of new vehi­cles like Cen­tral Gold Trust and gold Exchange Trad­ed Funds (Elf’s) are being cre­at­ed.

3. Alarming Financial Deterioration in the US

In the space of two years, the fed­er­al gov­ern­ment bud­get sur­plus has been trans­formed into a yawn­ing deficit, which will per­sist as far as the eye can see. At the same time, the cur­rent account deficit has reached lev­els which have por­tend­ed cur­ren­cy col­lapse in vir­tu­al­ly every oth­er instance in his­to­ry.

4. Negative Real Interest Rates in Reserve Currency (US dollar)

To com­bat the dete­ri­o­rat­ing finan­cial con­di­tions in the US, inter­est rates have been dropped to rock bot­tom lev­els, real inter­est rates are now neg­a­tive and, accord­ing to state­ments from the Fed spokes­men, are expect­ed to remain so for some time. There has been a very strong his­tor­i­cal rela­tion­ship between neg­a­tive real inter­est rates and stronger gold prices.

5. Dramatic Increases in Money Supply in the US and Other Nations

US author­i­ties are ter­ri­fied about the prospects for defla­tion giv­en the unprece­dent­ed debt bur­den at all lev­els of soci­ety in the US. Fed Gov­er­nor Ben Bernanke is on record as say­ing the Fed has a print­ing press and will use it to com­bat defla­tion if nec­es­sary. Oth­er nations are fol­low­ing in the US’s foot­steps and glob­al mon­ey sup­ply is accel­er­at­ing. This is very gold friend­ly.

6. Existence of a Huge and Growing Gap between Mine Supply and Traditional Demand

Gold mine sup­ply is rough­ly 2500 tonnes per annum and tra­di­tion­al demand (jew­ellery, indus­tri­al users, etc.) has exceed­ed this by a con­sid­er­able mar­gin for a num­ber of years. Some of this gap has been filled by recy­cled scrap but cen­tral bank gold has been the pri­ma­ry source of above-ground sup­ply.

7. Mine Supply is Anticipated to Decline in the next Three to Four Years

Even if tra­di­tion­al demand con­tin­ues to erode due to ongo­ing world­wide eco­nom­ic weak­ness, the sup­ply-demand imbal­ance is expect­ed to per­sist due to a decline in mine sup­ply. Mine sup­ply will con­tract in the next sev­er­al years, irre­spec­tive of gold prices, due to a dearth of explo­ration in the post Bre‑X era, a shift away from high grad­ing which was nec­es­sary for sur­vival in the sub-eco­nom­ic gold price envi­ron­ment of the past five years and the nat­ur­al exhaus­tion of exist­ing mines.

8. Large Short Positions

To fill the gap between mine sup­ply and demand, cen­tral bank gold has been mobi­lized pri­mar­i­ly through the leas­ing mech­a­nism, which facil­i­tat­ed pro­duc­er hedg­ing and finan­cial spec­u­la­tion. Strong evi­dence sug­gests that between 10,000 and 16,000 tonnes (30- 50% of all cen­tral bank gold) is cur­rent­ly in the mar­ket. This is owed to the cen­tral banks by the bul­lion banks, which are the counter par­ty in the trans­ac­tions.

9. Low Interest Rates Discourage Hedging

Rates are low and falling. With low rates, there isn’t suf­fi­cient con­tan­go to cre­ate high­er prices in the out years. Thus there is lit­tle incen­tive to hedge, and gold pro­duc­ers are not only not hedg­ing, they are reduc­ing their exist­ing hedge posi­tions, thus remov­ing gold from the mar­ket.

10. Rising Gold Prices and Low Interest Rates Discourage Financial Speculation on the Short Side

When gold prices were con­tin­u­ous­ly falling and finan­cial spec­u­la­tors could access cen­tral bank gold at a min­i­mal leas­ing rate (0.5 — 1% per annum), sell it and rein­vest the pro­ceeds in a high yield­ing bond or Trea­sury bill, the trade was viewed as a lay up. Every­one did it and now there are numer­ous stale short posi­tions. How­ev­er, these trades now make no sense with a ris­ing gold price and declin­ing inter­est rates.

11. The Central Banks are Nearing an Inflection Point when they will be Reluctant to Provide more Gold to the Market

The cen­tral banks have sup­plied too much already via the leas­ing mech­a­nism. In addi­tion, Far East­ern cen­tral banks who are accu­mu­lat­ing enor­mous quan­ti­ties of US dol­lars are rumored to be buy­ers of gold to diver­si­fy away from the US dol­lar.

12. Gold is Increasing in Popularity

Gold is seen in a much more pos­i­tive light in coun­tries begin­ning to come to the fore­front on the world scene. Promi­nent devel­op­ing coun­tries such as Chi­na, India and Rus­sia have been accu­mu­lat­ing gold. In fact, Chi­na with its 1.3 bil­lion peo­ple recent­ly estab­lished a Nation­al Gold Exchange and relaxed con­trol over the asset. Demand in Chi­na is expect­ed to rise sharply and could reach 500 tonnes in the next few years.

13. Gold as Money is Gaining Credence

Islam­ic nations are inves­ti­gat­ing a cur­ren­cy backed by gold (the Gold Dinar), the new Pres­i­dent of Argenti­na pro­posed, dur­ing his cam­paign, a gold backed peso as an anti­dote for the finan­cial cat­a­stro­phe which his coun­try has expe­ri­enced and Rus­sia is talk­ing about a ful­ly con­vert­ible cur­ren­cy with gold back­ing.

14. Rising Geopolitical Tensions

The dete­ri­o­rat­ing con­di­tions in the Mid­dle East, the US occu­pa­tion of Iraq, the nuclear ambi­tions of North Korea and the grow­ing con­flict between the US and Chi­na due to Chi­na’s refusal to allow its cur­ren­cy to appre­ci­ate against the US dol­lar head­line the geopo­lit­i­cal issues, which could explode at any­time. A fear­ful pub­lic has a ten­den­cy to grav­i­tate towards gold.

15. Limited Size of the Total Gold Market Provides Tremendous Leverage

All the phys­i­cal gold in exis­tence is worth some­what more than $1 tril­lion US dol­lars while the val­ue of all the pub­licly trad­ed gold com­pa­nies in the world is less than $100 bil­lion US dol­lars. When the fun­da­men­tals ulti­mate­ly encour­age a strong flow of cap­i­tal towards gold and gold equi­ties, the tril­lions upon tril­lions worth of paper mon­ey could pro­pel both to unfath­omably high lev­els.

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