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The Mounting Reasons to Stockpile Gold

The price of gold and the number of reasons to own it are moving in opposite directions.

Gold continues to seek support after dipping beneath $1,550 per ounce recently, while current global developments and increasingly visible macroeconomic scenarios underlying the bullish long-term outlook for the monetary metal have only increased in number and scale. Given the most attractive entry prices that investors have seen in some time, let's have an updated look at the bullish fundamental landscape for gold and the array of seasoned professionals who have recently accumulated gold exposure.

Stacking up the reasons to buy into the bricks
What I find most disturbing about JPMorgan Chase's massive sour bets in derivative instruments -- and the very existence of the offending unit's reported $100 billion portfolio of "asset-backed securities and structured products" -- is the stark reminder of how little has changed in the behavior of our too-big-to-fail financials since the initial stages of the global financial crisis. Hedge fund manager James Rickards reminds us that many of the same folks who opened Pandora's box with the disastrous proliferation of securitized debt markets continue to play Russian roulette with our collective financial future.

In Rickard's words: "Wall Street CEOs ask to be treated like nuclear engineers and say "trust us" when it comes to the complexity of their tasks. In fact, no trust could be more misplaced and no claim to superior knowledge could be further from the truth." Dodd-Frank, frankly, is no Glass-Steagall. Systemic risk has not been purged, but has merely absconded from public consciousness. As the timeless antithesis to leveraged casino gambling and counterparty risk, gold will continue to increase in value against the paper currencies ravaged by the inevitable bouts of deleveraging to come.

Speaking of the inevitable, Greece is looking increasingly likely to exit the eurozone. Less than three months after the European Central Bank shelled out $713 billion in low-cost loans to 800 financial institutions, the clear consensus is that far more intervention will be required to arrest the seemingly unstoppable contagion of debt distress. The chorus of political voices in Europe calling for a change from Angela Merkel's reluctance to embrace limitless intervention and stimulative spending has reached a deafening crescendo, and in my view the outlook for a return to fiscal or monetary sanity on the continent has never been further from reach.

Because the entire global monetary regime has effectively descended into a perpetual contest of competitive devaluation, Fools can bet that Europe's looming crisis interventions will not occur in a vacuum. Accordingly, the International Monetary Fund has asked the Bank of England to cut interest rates further and resume debt monetization, adding that fiscal stimulation remains an important contingency in the event that those monetary efforts fail to spur adequate growth. While downgrading Japan's sovereign credit rating to A+, Fitch Ratings observed that the nation's "fiscal consolidation plan looks leisurely relative even to other fiscally-challenged high-income countries."

That's quite a mouthful from Fitch, since political expediency here in the U.S. is bound to ensure that the looming "fiscal cliff" never materializes to any meaningful degree. As I wrote on my CAPS blog a few weeks ago, the watershed election of French president Francois Hollande places politicians on notice that "threatening to inject austerity into a subsidized, stimulated, and data-massaged illusion of relative economic stability is tantamount to swift political suicide." On the monetary side, both PIMCO bond guru Bill Gross and Goldman Sachs continue to share my view regarding the inevitability of a third round of quantitative easing from the Federal Reserve.

Each of the preceding macroeconomic developments and looming scenarios bolsters the long-term bullish case for gold. Collectively, in my opinion, the full nature of our global financial predicament (and the alarmingly predictable policy responses to them) guarantees a gold price well north of my conservative $2,000 price target.

Look who's buying gold now
Moreover, I perceive little downside risk from these levels -- and I am not alone in that assessment, either. During the 2008 correction in gold, a well-informed estimate of the gold-mining industry's all-in cost of production provided a timely indication of a likely floor beneath the metal's prevailing price. At the time, Gold Fields (NYSE: GFI  ) CEO Nick Holland pegged the industry's comprehensive cost at $700 per ounce, and indeed that mark held as a cement floor beneath gold. Presently, Holland estimates the industry's all-in cost at $1,400 per ounce, and he recently revealed that Gold Fields is "using US$1500 as a long term price because we try to structure the business around a floor price, and we think that is a good floor price." Economist Marc Faber has likewise pegged $1,500 as "significant support." Legendary commodity investor Jim Rogers has said he will buy more gold at $1,600 per ounce and step up his buying if it dips to $1,500. Ultimately, I maintain, $1,500 gold is just the beginning.

A menagerie of noteworthy buyers of gold in the first quarter of 2012 serves as a reminder that seasoned professionals are not pressing their luck by trying to time a precise bottom to execute their gold purchases. Billionaire George Soros tripled his stake in the SPDR Gold Trust (NYSE: GLD  ) during the quarter, while hedge fund Eton Park Capital initiated a holding with 739,117 shares of the bullion proxy worth about $113 million at the time of this writing. Other noteworthy accumulators of gold included Gross' PIMCO, the Teacher Retirement System of Texas, and a Japanese pension fund.

John Paulson kept his huge gold bullion position unchanged and added to his stakes in gold miners Barrick Gold (NYSE: ABX  ) and promising mid-tier selection IAMGOLD (NYSE: IAG  ) . Highlighting the compelling opportunity in mining shares after the shocking weakness that has gripped the sector, Gabelli & Company fund manager Caesar Bryan pointed out during a recent interview with King World News that a $1,000 investment in Goldcorp (NYSE: GG  ) offers exposure to more than six times as much gold as a corresponding stake in a bullion vehicle. An equal stake in leading mid-tier miner Eldorado Gold offers exposure to eight times as much gold!

I have issued outperform calls for each of the miners named above in my Motley Fool CAPS portfolio, and just as I have through prior corrective pauses, I will patiently await the next inevitable rally in the sector to spur a return to more reasonable equity valuations for the miners of gold and silver.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Eldorado Gold, Goldcorp, and IAMGOLD. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Read/Post Comments (3) | Recommend This Article (20)

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 May 23, 2012, at 3:33 PM, talan123 wrote:

    I believe that Gold should be used as a hedge only in believing in the downfall of a society or economic area. With the markets this jittery right now, tying up your money in gold doesn't seem to me like a smart move. Gold is only useful when you can sell it to other people for money and if they are not able to buy it then there is no point to owning the gold. India and China are showing major signs of stress in their economies. India's currency has dropped 15% in value which is showing major signs of inflation. China is showing signs of massive investment OUTFLOW.

    Having cash on hand right now is more important to me than tying it up in some kind of safe haven.

    I firmly believe that the greatest safe haven is cash for the current liquidity trap we are in. Of course once we are out of it...

  • Report this Comment On May 24, 2012, at 6:55 AM, Noneleft01 wrote:

    Some persuasive reasons not to give up on Gold and it’s miners. Not among them for me, however, is a Japanese pension fund or the teacher retirement system in Texas. There are millions of such bodies all over the world who are not buying gold, so why should the actions of these two alone be singled out as an indicator?

    I’m still holding but have stopped adding to my position due to the brutal ongoing decline in prices. Just when I think a bottom is in, prices drop again and again.

    I do believe prices will go much higher at some point, but it hurts to think how much more could now be bought at todays much lower prices if one had held off buying a few weeks back when prices then seemed low - I could easily be saying the same in a few more weeks if I buy at todays seemingly lowered prices.

    On Caeser Bryan’s comments about buying shares in GG or EGO and owning a stake in many times more gold, through those companies, than if you invested the same in bullion: I have a crucial question – is this multiplied gold haul already mined and processed and stored above ground, or are we talking about reserves and resources still in the ground? If the latter, then I don’t think comparison with bullion is appropriate due to the obvious risks and costs involved in mining it – hence the valuations.

  • Report this Comment On May 24, 2012, at 7:00 AM, lnardozi wrote:

    Just yesterday news broke that even gold in ALLOCATED accounts is being leased out into the market (King World News) .

    Institutional investors with allocated gold positions arrived at the vaults to take possession only to find an empty vault. When the gold was finally delivered, they weren’t the numbered bars specified by the account, but new bars minted in 2011.

    As a holder of GLD, unless you have 100,000 shares AND can secure the help of an Authorized Participant, you have NO gold. Also, according to the prospectus, you’re an UNSECURED creditor. Yes, THEY have a list of bars, but those bars aren’t YOUR bars, they’re GLD’s. Not to mention GLD being implicated as the primary mechanism for manipulation of the gold price – why give money to your enemies? Since even ALLOCATED accounts have counterparty risk, what is the point of having gold in the first place?

    Remember, bank runs close ALL parts of the bank – the gold vault doesn’t magically stay open.

    Eliminate your counterparty risk for whatever you’d need to start all over again – assume at some time during your life you’ll lose everything. Plan for it, because you never know.

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