700 Billion Reasons to Own Some Gold

To Egyptian Pharaohs, it brought immortality in the afterlife. For Roman Caesars, it facilitated trade throughout the known world. To the Incas of Peru, gold was the sweat of the sun, while to their Spanish invaders it was the prize of brutal conquest.

Amid this financial crisis of historic proportions, gold is once again gaining favor as a tangible store of honest value. Though often maligned as an outdated relic, gold has tripled in value since 2001. Meanwhile, the greenback has declined 33% against a basket of foreign currencies.

For those of you wondering what that has to do with your future, I have a list a mile long of reasons to consider having at least some gold exposure. For the purposes of this article, I've pared the list down to five:

  1. Inflation looms ever larger. $700 billion is a ridiculously large sum. But while we've been busy debating the ethical quagmire of conditional capitalism, the Federal Reserve announced a $630 billion bump to its currency injections into the financial system on Monday. Combined with operations earlier in September, that brings the total announced just in the past month to more than $1 trillion. Even without the help of Treasury's $700 billion lifeline, the Fed is placing dollars into circulation at an alarming rate, which many analysts believe is decidedly dollar-negative and predictive of a continued rise in the rate of inflation. As troubled as I am about these policies, there has been a clear negative correlation over time between the value of the U.S. dollar and the price of gold in dollars. For this reason, I view every subsequent commitment of dollars by the billions as a billion more reasons to own gold.
  2. Physical gold is becoming more scarce. The combination of renewed investor demand and a global mining industry facing countless challenges to production has altered the supply and demand dynamic to favor the long-term gold investor. For starters, we have bullion ETFs taking massive quantities of gold bullion off the market. The physical holdings of the SPDR Gold Shares (NYSE: GLD  ) ETF soared to a new record above 755 tonnes of gold at the end of September. That's more gold than China held in reserve as of June. Furthermore, the Central Fund of Canada (AMEX: CEF  ) , a closed-end fund that owns gold and silver, issued another non-dilutive share offering in September to purchase more bullion. In recent weeks, this Fool watched with interest as a single major purchase wiped out the supply of the world's largest gold refiner, the futures market in Vietnam lacked an adequate supply to redeem contracts for bullion, and the U.S. Mint ran out of the popular gold buffalo bullion coin. Demand is growing, and the above-ground supply of gold appears to be shrinking fast.
  3. Banks are looking to build gold reserves. Across the globe, banking industry experts are forecasting major gold purchases by central banks and private institutions alike. The manager of Austria's central bank believes that the banks of nations with smaller gold reserves could be considering adding gold to protect themselves against currency fluctuations. China may be starting the process already. Jeremy Charles of HSBC believes institutional investors such as private banks will want to reestablish gold holdings as well.
  4. Guess who's long on the TOCOM? Serious gold investors love to watch the Tokyo Commodities Exchange (TOCOM). The TOCOM lists the names of the entities conducting trades, permitting gold bugs to track the shifts in long and short positions for major traders like Goldman Sachs (NYSE: GS  ) . Reversing a long-standing net short position, a Japanese subsidiary of Goldman shifted to a net long this week.
  5. Insiders agree: gold is going much higher. From Goldcorp (NYSE: GG  ) founder Rob McEwen, to Fronteer Development Group (AMEX: FRG  ) CEO Mark O'Dea, mining industry executives are increasingly comfortable spelling out their long-term price targets for gold. Executives from Gold Fields (NYSE: GFI  ) and Barrick Gold (NYSE: ABX  ) have estimated that the all-in cost of mining gold from the ground amounts to about $800 per ounce for the industry, suggesting the long-term price floor continues to build upward.

In addition, analysts from Barclays Capital and GFMS believe that gold will reach new highs within the next six months, while Superfund Financial's Aaron Smith expects to see $1,500 gold over the next two to three years.

Of course, not everyone is sold on gold. Goldman Sachs recommended shorting gold as one of its top ten trades for 2008, predicting the metal would plummet to the $600-$650 range. I certainly don't think we'll see those levels, but judging by the volatile swings in my CAPS score, gold mining equities admittedly haven't provided much safety so far this year.

Nonetheless, as Goldman shifts from short to long on the TOCOM, and Washington tries to smother a financial fire with cash kindling, I still believe both bullion proxies and well-chosen gold miners will reaffirm gold's relevance as a tangible "safe haven" asset.

Further Foolishness:

Gold is a hot topic on the blogs at Motley Fool CAPS. Join the free service today and see just how many Fools are taking the long view when it comes to investing in gold. The "Gold" tag at Motley Fool CAPS lists 85 companies, and you'll find Christopher's comments on most of them.

Fool contributor Christopher Barker captains yachts and writes about stocks. He can also be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Central Fund of Canada, Gold Fields, and Fronteer Development Group. The Motley Fool has a gilded disclosure policy.


Read/Post Comments (5) | Recommend This Article (46)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 02, 2008, at 7:50 PM, XMFSinchiruna wrote:

    Today, October 2, Goldman's Japanese subsidiary shifted to a net short position once more. Question: did such a shift precipitate the downward price action or simply coincide with it? Hmmm.

    http://www.tocom.or.jp/souba/gold/torikumi.html

    When Goldman Sachs and Morgan Staley were converted into bank holding companies recently, they were both granted an exemption that granted them continued permission to trade on the commodities markets. Another interesting coincidence.

    http://www.bloomberg.com/apps/news?pid=20601072&refer=en...

  • Report this Comment On October 04, 2008, at 8:17 PM, 123go100 wrote:

    dont understand fully why gold is so valued. seems to me if you can be buying good cropland that would be far more valued then gold. more so now than ever before.

  • Report this Comment On October 05, 2008, at 1:34 AM, XMFSinchiruna wrote:

    123go100:

    Honestly, there's nothing I can say to refute that. I think farmland is as safe asset as gold is. :)

    Farm on!

  • Report this Comment On November 30, 2008, at 4:27 AM, eltarik wrote:

    "while to their Spanish invaders it was the prize of brutal conquest" <- can you explain this please? The romans needed the gold for the very same reason the spanish neeeded it. To fund their expansive imperialistic nations.

    Spain endured not one, but 3 complete bankruptcies under King Felipe II, even though during his reign, Spain was called the Empire where the Sun never set as Spain controlled land in every longitude of the world.

    The Spanish should have done like the more entrepreneural British who found that the farming and basic extractive industries were the real "gold mines" of America.

    So please, refrain from talking about brutal conquest, when you can clearly see that the Spanish mingled and married many natives of central and south american, and you can see that today in most countries of South America where most cultures that were there back then are still here today.

    Were the Spanish bad many times? Definitely. Were they brutal? Not more than the slave trading portuguese or British.

    Interesting article by the way, however I am starting to feel that the Fools here are really trying to push us to buy gold, when it is continuing on its downward journey.

    Have a foolish day.

  • Report this Comment On May 09, 2009, at 4:28 AM, Goldtradingcalls wrote:

    Good read. One should have some percentage of Gold in personal holding.

    GoldTrader

    www.GoldTradingCalls.com

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