Friday, April 17, 2009

Own Gold Always

For 6,000 years, since the beginning of recorded history, gold has been revered as a storehouse of financial value as well as a beautiful substance with which to fabricate jewelry and works of art. From Egyptian pharaohs to modern-day magnates such as George Soros, Warren Buffet, and Bill Gates, people have acquired gold to maintain and increase their wealth. Even in the most stable times or when the stock and/or real estate markets are on fire, the smart money keeps 5-10% of its assets in gold. Being smart, they do not put all their faith in money managers and stock brokers whose income depends on encouraging investment in paper assets. They know that the political and economic climate often changes rapidly and unexpectedly, as it did, for example, on Sep. 11, 2001, and with the US invasion and occupation of Iraq.
In another article we describe the urgent reasons to invest in gold today and the potentially enormous profits you can reap from investing in gold today. Here, however, we stick with the reasons why wise investors always own gold.

If all the gold mined over the last 6,000 years were gathered and melted down, it would form a cube with sides of no more than 20 yards.

Constant demand

About 80% of the gold bought today is used to make jewelry. Gold jewelry is in high demand not only in the world's richest and most industrialized countries, but also in India, China, and other Asian countries, as well as in Latin America and Africa. The gold jewelry market is so diverse that when demand declines in one area, it is likely to rise in another. Furthermore, demand for gold jewelry tends to decline only during periods of economic downturn. But it is precisely during such periods that investment demand for gold rises rapidly.

Constant rarity

Companies can and do issue additional shares of stock, diluting the shares already held by investors. Governments print money and inject it into the economy, diluting the cash in your pocket and bank accounts. Even many non-paper assets, such as mass produced collectibles, are, well, mass-produced. Their supply is essentially infinite.

Gold, however, is one of the scarcest substances on earth. Tons of ore must be processed to produce an ounce of gold. According to the US Bureau of Mines, all the gold ever mined throughout history and throughout the world would build a cube measuring only 60 feet on edge. Furthermore, as relatively easy-to-mine sources are depleted, new sources of gold are harder and harder to find. And it takes, on average, about seven years to bring a new source of gold into commercial production, which creates a major gap between increasing demand and increasing supply.

Universal liquidity

Many hard assets do not have the liquidity of stocks and bonds. There are times when it can take months or even years to sell real estate, art, or collectibles such as carpets or antiques. Gold, in the form of bars or bullion coins issued by the US Mint and other mints, is traded on an active global market in North and South America, Europe, Africa, and Asia. It is always easy to buy gold and easy to sell it.
Nor are gold sales encumbered by the paperwork and government tax filings that characterize stock and bond trades. Even if stock markets fail, banks close, and governments are in crisis - in fact, especially under those circumstances - there are eager bidders for gold in every city and country in the world.

True diversification

Our parents told us, "Don't put all your eggs in one basket." Investment advisors also preach the virtue of diversification. But by "diversification" they often mean split your assets between stocks and bonds, and between large cap, mid-cap, and small cap growth and value stocks, with some international equities thrown in. Unfortunately, when the whole stock market swoons, especially when the bond market crashes alongside it, you can find yourself holding only one basket after all. Such scenarios can and do take place in real life, as many of us have discovered from reading about the Japanese stock market, or about recent events in Argentina - or from reading our own portfolio statements.
Gold, however, is a true portfolio diversifier. Its "correlation coefficient" with the price of global stock has ranged within plus or minus 0.4 since 1993, averaging around zero. In plain English, that means that the price of gold does not vary with the stock market, but independently from the stock market. Owning gold really is holding another basket.

Always own gold

Constant demand, constant rarity, universal liquidity, and true diversification. These are among the key reasons a wise investor always owns gold as a portion of his or her portfolio. Although more investment advisors are recommending gold now than during the 1990s, most still ignore gold and favor holding only paper assets. They have no way of profiting from recommending buying physical gold, which may have something to do with their outlook. In our view, such narrow thinking is always wrong. In today's economic and political environment, it is horribly, even tragically, wrong.

Smart investors always diversify. Wise
investors always include gold in their asset mix. Unlike paper investments such
as stocks, bonds, and even dollars, gold is always in demand. When the Internet
bubble burst, a ton of tech stocks fell to pennies, even to zero. Since 1980, an
ounce of gold has never been worth less than $250.

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