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Is This the Time to Buy Gold?
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(October 26, 2002) We are often asked to share the ‘inside scoop’ about the future price directions for gold. We’ve even caught flak for publishing a newsletter that doesn’t predict future gold prices. In fact, we think gold is woefully undervalued today, but the gold market is a lot smarter than we are. Here are a few (unedited) ramblings about the nature of markets, and our obvious advice to…just do it.
A market is the sum of the knowledge, experience, and needs of all the buyers, sellers, producers, and users of that particular commodity. Gold is no different from any other worldwide market. The factors effecting the gold price every day are many - ranging from the weather in Rangoon to interpretations of Alan Greenspan’s latest pronouncements – but boil down to good old supply and demand.

THE SUPPLY SIDE OF GOLD

Some 2400 tons of gold are mined every year. At first that certainly sounds like a lot, particularly for a commodity which doesn’t get consumed. But if you divided that yearly production of gold among every man, woman, and child in the world, each of us would receive a piece of gold about the size of a sesame seed. Our share would be .38 gram, or .0123456 troy ounce. That’s worth about $3.85 at $310 per ounce.

Of course, mankind has been digging gold out of the ground for many millennia, and we’ve managed to stack up quite a bit of it here and there. Estimates are that approximately 125,000 tons of the stuff is already made into jewelry, or stored away in banks, depositories, safes, and a multitude of hiding places. That works out to almost 20 grams (worth about $200 at $310/ounce) for every person on this planet. Twenty grams is about the weight of a typical his-and-hers wedding band set.

THE DEMAND SIDE FOR GOLD

Here’s where it gets tricky. First of all, no one really needs gold. It has industrial uses in electronics, plating, window-tinting and so forth, but there is no absolute need for gold in the forms that 99% of gold is fabricated into: Jewelry, ingots, and coins. People may WANT gold in these forms, in various degrees of fervor depending on the world’s condition, but they don’t NEED any of this gold.

What triggers increasing demand, and therefore higher prices, for gold? That’s the big question, because the demand side is where the action is as far as the gold market is concerned.

Are investors fleeing the dollar? Is a war imminent? What is the current interest rate yield? What is the prospect for U.S. equities? How strong is the dollar? How strong are competing currencies? Where is gold in its longer price cycle? What is the demand picture from India, China, Europe, and the tiny but growing U.S. investor market? What is the potential crisis which could make gold the last, best place to put your money?

The total supply of gold is virtually fixed. As discussed, there’s enough gold in the world to make everybody on Earth a couple of gold rings, and every year another tiny little sesame seed size nugget of gold is added to each of our shares. These supply figures are available to anyone who cares to find out.

Demand simply increases whenever more people decide that they have too many dollar assets and too little of their share of the world’s gold.

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Every time someone buys an ounce of gold, someone sells an ounce. Thus the price of gold is NEVER “too high” or “too low,” because half of the world is trading money for gold, while the other half is trading gold for money. If more people want to spend their money on gold, then the price will have to go up. If more people want to give up their gold for money, then the price will go down. Not maybe, not someday, not in the long run - but instantly, right now.

The buyer thinks it’s a good buy, or it suits his or her needs at the time to have the gold. The seller considers it a good price, or he or she needs the money more than the gold at the time. Those that consider the price too high or too low, don’t participate unless they are forced to.

That is the symmetry and beauty of a free market. Every day’s price is the perfect expression of millions of participants buying and selling billions of dollars worth of gold. For every gram, there is a buyer and a seller, and together, they make the market.

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An honest gold dealer will not tell you that he knows where (and more importantly, when) the market is going. He is just a merchant. Although he may be very knowledgeable about gold, he has no special insights as to where gold prices are going – he just buys and sells, and makes his percentage, and moves on A good dealer maintains a more or less constant position and serves his clients by both buying or selling when his clients are ready.

If a dealer/broker/newsletter-promoter knew the future direction of gold prices, what would compel him to go through the expense, effort, and risk of dealing in gold when he could be lying on the beach and from time to time phoning in his impeccably-timed market orders?

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To confuse matters further, let’s state that there is no price of gold. Gold remains constant, it is the price of the currency that you use to buy the gold with that fluctuates. On any given day it may take more or fewer dollars, or yen, or euros, to buy an ounce of gold, because the fortunes and the strength of these man-made currencies rise and fall. Gold is the measure of each currency, not vice versa.

For instance, when we say that gold is trading for $310 per ounce, we are stating how many dollars it takes to buy an ounce of gold. If gold later trades for $620 the ounce, then it’s not really true to say that gold doubled in value. More accurately we would say that the dollar fell in value by half. Gold stayed the same while the dollar fluctuated.

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For most of us, all of our assets are denominated in dollars. We live in a dollar world – our spending money, bank and brokerage accounts, stocks, bonds, mutual funds, IRAs, 401(k)s, future pension and Social Security payouts, etc., are all dollar-based. Which is as it should be, because the dollar is our measure of account.

But our dependence on the dollar means that each of us has bet our entire financial security on the stability and strength of that dollar. Gold is the one commodity that can counter-balance that risk. When the dollar swoons, and dollar-denominated assets suffer, gold is your economic insurance that moves exactly the opposite of the direction of the dollar.

Gold is like any other insurance. For instance, you insure your house against loss by fire, but you certainly don’t hope that your house burns down. Likewise, with gold, you don’t buy it hoping for an economic disaster. But you’re glad to have the gold, it costs virtually nothing to store, and you can sleep better at night.

Gold you only have to pay for once, rather than the usual kind of insurance policy for which you pay out premiums years after year. And gold always has a cash redemption value if you wish to convert it.

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Gold is probably the only commodity that you purchase in the hopes that you never need it. And if you’re lucky enough not to need it yourself, then it’s there for your loved ones, family, and generations to come.

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There’s no outguessing the gold market, any more than you can outguess any market. None of us is smart or lucky enough to always buy at the bottom, or sell at the top.

The main part of our business consists of meeting people who have decided that, yes, they are definitely going to buy (or sell) gold, but they would like our counsel in deciding exactly when to make their move. Our decades of experience and hard-earned insights into the gold market have taught us that there is only one piece of advice we can give them:

Just Do It. The right time to act is NOW.

Yes, the market might be higher tomorrow, or lower. And if you put off your transaction for a day, and you see that next day’s market results, then you’ll inevitably think to yourself: Well, then, how about I wait one more day? Will I do better then? At a certain point, you won’t be able to do anything about it at all, because the daily changes in the market have frozen you like a deer in the headlights. Rather than take action and get done what you set out to do, you’ve become a spectator/speculator, forever caught up in the process.

Are you going to buy at the lowest price? No.

Are you going to sell at the highest price? No again.

Are you going to drive yourself nuts watching a market every day, trying to predict, getting caught up in it, being fooled by false moves, giving yourself over to the elation and despair of fluctuations, and finally picking a day and price which, of course in retrospect, will prove not be the perfect time to buy or sell? It’s up to you.

If you do, in the end, you will have expended days, weeks, or even months of your time and energy, with a result probably no better than if you had just jumped straight in on the day you decided that it was the right move for you.

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In the long run, which is what you buy gold for, a few dollars in price higher or lower won’t matter much. You don’t have to be a market genius or an international financial maven to own gold – you just buy some. Gold is democratic and universal. It is the form of wealth stored by the ton in central banks’ vaults, held by the troy pound in family holdings in Europe, and hidden away by the gram by agrarian peasants everywhere.

Only in the United States, where many citizens believe that the dollar’s role as the world’s premier reserve currency will never be challenged, are private holding of gold uncommon.

U.S. citizens are among the least gold-conscious people in the world. Your typical American accepts that he has money in the bank, money in equities markets, money in his or her retirement plans, and never stops to think that all that ‘money’ is in fact a number of ‘dollars’ backed by the full faith and credit of our federal government.

Your average citizen sees no difference between ‘money’ and ‘dollars.’ Why should he? There’s never been a difference in his lifetime, or his grandfathers’ lifetime, or for any of his ancestors going back 200 years. Most Americans are not aware of any risks in holding their assets exclusively in dollar-denominated forms. After all, aren’t dollars money?

Gold is not an investment, but holding gold is a prudent balance against assets held primarily in dollar forms. By holding as little as 5% of one’s assets in gold, you insure a portfolio against a variety of ugly scenarios involving threats both to the dollar and to the United States.

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People in the U.S. tend to make gold more complicated that it is, and shroud it in mystery, and imagine that they can’t acquire any without some “insider knowledge” to work with.

But gold is simply an element. It’s permanent, indestructible, doesn’t even tarnish, and is considered money the world over. It’s the most liquid thing you’ll ever own. And gold will never announce an earnings restatement, default on its payments, or go into Chapter 11.

In fact, gold is the simplest of all financial holdings. At today’s prices, you should own some.

 

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