Gold: Get Some
by Bill Sardi
Recently by Bill Sardi: Losing Your Mind: Is Modern Civilization ToBlame?
I can recall listening to radio broadcasts over the past two or three decades where a purveyor of gold bars or coins came onto the broadcast to say the world faces economic gloom and doom and we had all better buy some gold.
Typically, as the sales spiel would go, radio listeners would hear that the market for industrial gold and silver is opening up in China and that if just one more ounce of gold or silver was used by every person in China, why there would certainly be a shortage of these precious metals. Based upon limited supply and increased demand, the spot price is sure to rise.
Gold for the day of reckoning
If the day comes when the US dollar becomes confetti (it could any day), US gold and silver coins would likely be the only medium of value that US citizens and shopkeepers recognize as an alternative to paper money.
However, today, with obvious worldwide debt that cannot be repaid and the printing of fiat money to meet the government’s obligations, and predictable hyperinflation to follow, a worldwide economic crash is imminent. Marc Faber, publisher of the Gloom & Doom Report, confirms that this time the "gold bugs" (investment counselors who are bullish on buying gold) are not "crying wolf."
You can play with the big boys
You may perceive the sale of gold bars and coins as a relatively small market compared to another commodity such as oil. But actually, the London Bullion Market Association “over-the-counter” (OTC) gold market, which trades approximately 90 percent of the world’s physical gold trade, averages 2100 metric tons @$1150 per ounce = $21.8 billion in sales a day, compared to 82 million barrels of crude oil per day @$77 per barrel, which totals just $6.3 billion a day. The gold market is 3.5 times greater than crude oil! So you can fully understand the big buyers control that spot price of gold. You can also understand, while you aren’t a big enough player to buy oil, you can buy gold!
Not only do central bankers and gold distributors influence the price of physical gold, but super-wealthy individuals can also influence the spot gold price. George Soros, the billionaire trader, actually attempted to sucker holders of physical gold to sell their holdings as he drew news media attention for his statement that gold represented “the ultimate asset bubble.” However, it was Soros himself who was swooping up all the gold he could buy.
And there are bigger buyers of gold than Soros. If you think Bill Gates and Warren Buffet are the wealthiest people in the world you are falling for the propaganda the world news media delivers. Some investigators report the hidden wealth of the Rockefeller family in 1998 was ~$11 trillion, and the Rothschilds in England $100 trillion.
Price of gold is deceiving
The price of gold and silver have long been manipulated, particularly by the central bank of the United State (the Federal Reserve). However, I will demonstrate here how this manipulation has created a deceivingly low price for gold in the face of news bulletins saying gold has reached an all-time high spot price of $1226.56 in December of 2009.
First, the selling price of gold (called the spot price) is a bit deceiving because this is the speculative price. It is largely influenced by the large buyers of gold, ranging from central banks and sovereign nations to gold distributors, who control the demand market. Whereas the typical reader of this column would be a middle-to-upper class American with limited funds to buy gold or silver coins, not for speculation, but as a survival strategy to pay bills should the US dollar eventually be devalued or hyper-inflation make the dollar worth less and less.
What is the demand for gold?
Just what is the current demand for gold, and how many available dollars are chasing gold and silver coins?
The amount of available dollars to purchase US gold coins by the masses is much smaller than realized. Consider that the top 1 percent of Americans own 42% of the wealth, the top 10% own ~71% of the wealth. Lower income groups won’t likely be purchasing gold and are expected to turn in their gold jewelry to melt down and make a profit as the price of gold soars.
It is more likely that the middle and upper classes will be buying gold, probably US gold and silver coins (1-ounce silver and gold American Eagles) that are legal tender inside the nation’s borders. As a percentage of the population, maybe only 1—4% of Americans own physical gold (i.e. own just one gold coin). If maybe 6 million Americans (2% of the population) become new buyers of just one 1-ounce gold coin @$1175 each, that would come to $7 billion of new sales. Of course, should this occur, the US Mint would have to halt sales mid-year because of inability to meet such a demand. The US Mint could be backordered for an indefinite period of time. The US Treasury Department continues to print paper money ad libitum, elevating the value of gold even further. Look what happened to sales of gold and silver coins in 2009.
US Mint Gold Eagle 2009 Sales Totals: 2009: 1,315,500* 1-ounce gold eagles (794,000 in 2008)
US Mint Silver Eagle Sales Totals 2009: 28,766,600 1-ounce silver eagles (19,583,500 in 2008)
*Sales of gold eagles were temporarily suspended by the US Mint in 2009 for lack of gold blanks.
It’s obvious, from these sales figures, that a tiny fraction of the population is buying newly minted gold and silver coins. Even if sales of all 1-ounce gold and silver eagles were combined (~30 million coins) and each purchase was for just ten coins, that would represent 3 million purchases, many probably being return customers. So maybe 1 in 300 Americans buy newly-minted coins from dealers, or from the US Mint directly. That’s not even one-half of 1-percent of the population.
Reticence to invest in gold
My amateur survey of people I have nudged to think about holding physical gold and silver coins reveals few have heeded this advice. Humans are creatures of habit. Most are happy to relinquish management of their money to others in communal pension plans (virtually all which are either insolvent, such as social security, or under-funded, like private and government worker pension plans).
Instead of buying gold, Americans, about 73 million of them, have chosen to place their money in tax-deferred 401k plans which have fallen in value by 31% from the end of 2007 to the end of March 2009.
Most teachers, truck drivers, nurses and law enforcement officers in this country have relied upon a communal fund to grow their money for retirement. The public has been lulled to sleep, believing others were managing their money responsibly. Many people feel money management is for professionals and is beyond their skill level. But most of these retirement plans have become nothing more than Ponzi schemes.
To buy gold is to invite fear. Why live with financial doom in the back of your mind? So people pass on the idea of gold and wait to hear if anyone else gives a buy signal before they jump into the gold buyer’s pool.
People say there is nothing they can do about what happens in the future, so they remain paralyzed like deer crossing a highway at night, frozen by the glare of oncoming automobile headlights. They unwittingly have chosen to see the value of their 401k accounts erode by 30% rather than risk making another bad decision.
For most Americans, gold and silver are as foreign as an overseas currency. This generation has completely lost track of the historical fact that the Constitution spells out in Article I, Section 10, that government cannot "make any thing but gold and silver coin a tender in payment of debts," and that the nation once backed paper money with gold. Paper money was only issued as a convenience to carrying gold — as a paper IOU redeemable for gold or silver. Now paper money is an IOU for nothing.
How much of your investment portfolio should be in gold?
You need a personal strategy to preserve your finances rather than rely upon government or financial counselors. Most people cannot fathom that bankers working in league with government are plundering your money. But that is precisely the current state of affairs.
While gold is growing in popularity in investment circles, according to Marcus Grubb of the World Gold Council, current gold investment allocation stands at less than 0.6% of total global wealth.
How much of your investment portfolio should be in gold? Here is what investment funds have invested in gold.
Harry Schultz, noted European investment advisor, says 40% of a person’s portfolio should be comprised of physical gold.
The folly of waiting for the price to drop
If you are waiting for the price of gold to drop from its current $1100+/ounce range to its 2003 price of $350/ounce before you buy some, you may not understand why there is a growing need for you to own some precious metals, preferably in the form of US coins. You may mistakenly reckon, as many now do, that gold is risky while money in the bank, even if it only draws a low rate of interest, is safer than gold.
Buying gold when the price is low, and selling when it is high, means you want to play speculator. Certainly, buy low and sell high is always in order. But, to be repetitious, the marketplace for gold is largely influenced by large buyers, such as purchases by central bankers, sovereign countries. For example, in 2008 the International Monetary Fund approved gold sales of 403.3 metric tons, representing one eighth of the Fund’s total holdings of gold at that time. World Gold Council also indicates a great deal of the demand for gold is exercised in ETFs (exchange trade funds), where, by the way, profits are often taken in cash rather than physical gold.
Profit-taking by selling gold in return for continually worth-less paper money would be folly. Don’t expect others who own gold to sell you some even if prices soar. Gold owners would be trading an asset that is rising in value for a piece of paper of diminishing purchasing power. Gold is going to become very scarce in the coming financial and currency crisis.
What is the true value of gold?
There IS a crystal ball. It is not difficult to see the immediate economic future. Almost all countries of the world are in debt that cannot readily be repaid. They are printing more fiat money to pay their bills but suffering the consequences of dilution of the purchasing power of their currency in doing so.
When the rate of expansion in the supply of money exceeds the rate of growth of goods and services in an economy, there will be inevitable hyper-inflation (e.g., $10 loaves of bread).
So it was not surprising to learn that gold, for which there is a limited supply, appreciated more over the past decade against all of the world’s currencies, for which there is, via the printing press or creation of electronic money, an unlimited supply.
If you are holding money in the bank, or hoarding paper money under a mattress, it is currently being diluted in value as the money supply continues to grow (see chart below), or nations may decide on political suicide and officially devalue their currency. Examination of the following chart shows the U.S. has chosen the former.
Advisor Gary North says the U.S. continues to "kick the can" and print money instead of truly dealing with the crisis.
The problem is that impending hyper-inflation is not realized immediately when government first dumps it into the economy as it hasn’t had time to go beyond the banks into the marketplace. The Federal Reserve, fearing hyper-inflation, has chosen to freeze bailout billions in the banks and pay bankers to park this money rather than loan it out to grow the economy and overcome unemployment. This is because, once bailout money has gone through the fractional-banking system and becomes ten times more money, it will massively dilute the value of existing money.
Use the increased supply of money to gauge the true value of the dollar.
The World Gold Council has published a report entitled "Linking global money supply to gold and to future inflation," which says for every 1% increase in US money supply there tends to be a 0.9% increase in the price of gold. So examine the above chart and see how much the money supply has suddenly increased.
Ned Schmidt of the Market Oracle has documented that the money supply has risen by an annualized rate of 1200% from June of 2008 to November of 2009. But the spot price of gold hasn’t risen in a parallel fashion, which is evidence of continued manipulation. If the World Gold Council formula is correct, gold should be trading at over $10,000 an ounce today!
How much gold is available for investment?
Of course, it would be wise to know how much gold actually exists, and how much is actually available as investment gold, so you can ascertain the true value of gold on a supply and demand basis.
How much gold is there in the world? The World Gold Council estimates, at the end of 2009, that all the gold ever mined amounted to about 165,000 tons. But the majority of it is not available for investment.
First, central bankers own gold as reserves. The World Gold Council reports that the international average is about 10.2% at current market prices but, in the European Union it is over 50% and the USA holds around 75% of its reserves in gold. This gold is not in play for investment.
While it is true that the US is the largest single holder of gold at 8135 tons, at the time EURO banknotes and coins were first put in circulation (2002) all the central banks in the Eurosystem held gold that aggregately totaled 12,574 tons (or 404.3 million troy ounces), considerably more than the US. Of course these numbers have changed since that time. According to the March 5, 2010 European Central Bank (ECB) report, the ECB held 268.1 EURO-billions of gold. While gold reserves of the national central banks remain in their possession, all gold and foreign exchange reserves are, under the terms of the Maastricht treaty, at the disposal of the European Central Bank.
Second, the International Monetary Fund holds tons of gold. At the end of January 2010 the IMF held 96.6 million ounces (3,005.3 metric tons) of gold at designated depositories, valued at $6.9 billion. By February of 2010 the IMF, attempting to build its cash reserves to aid in lending to needy countries, had reduced it holdings of gold to about $105.0 billion at current market prices.
Third, gold is also held by nations. The International Monetary Fund publishes a list of how much gold each country holds. A more readily accessible list that compares gold holdings by country on a single page can be found here.
Official World Gold Holdings WORLD GOLD COUNCIL June 2009
% of reserves
1. European Union
2. United States
4. International Monetary Fund
Gold is also used for industrial and medical purposes and to make jewelry. According to The World Gold Council, the demand for gold in 2009 was as follows:
Jewelry consumption 1747 tons Industrial and dental 367 tons Investment gold 1270 tons Source: World Gold Council Ton = 1,000 kilograms (2.2 lbs) or 32,151 troy oz of fine gold (2009 lbs)
In the investment gold category, 594 tons were swooped up by exchange-traded funds, and only 234 tons went for coin making (Source: World Gold Council)
Maybe only about 7—9% of gold is available to make bars and coins.
And now for the big kicker question — how much physical gold is actually in the vaults of the gold exchanges? It has been estimated that just one ounce of gold backs 20 ounces of gold sales. The banksters have done it again. They have sold more gold on paper than is actually being held in the vault.
There are irregularities and delays in the delivery of physical gold by the New York Mercantile Exchange and Commodity Exchange, Inc (COMEX) which is the world’s largest physical commodity futures exchange. It appears that COMEX vault doesn’t have all the gold it claims on its books. Some holders of gold IOUs are being offered cash instead.
You’re going to miss the major significance of all this fraud because you probably aren’t an investor in gold and think these developments will not touch your financial nest eggs.
On a supply-and-demand basis, if gold is not in vaults, then the gold supply has been artificially inflated. If it is revealed that gold supplies are in fact much lower, then physical gold will rise in value beyond comprehension and the value of paper money will crash. Investors will rapidly move to gold and out of the stock market, which will crash pension funds, etc. Such a collapse could cause a complete loss of confidence in paper money, which has no backing whatsoever, no more than the phony gold IOUs. It is no wonder these phony gold IOUs are such a guarded secret.
Investment advisor Marc Faber argues the price of gold today at $1100 an ounce is comparatively less than when it was sold for $300 per ounce a few years ago because it is in greater demand and far more scarce. Read Faber’s remarks here.
As the price of gold soars, don’t get distracted with invitations to buy into start-up gold mines. You need to think twice about startup gold mine stocks.
Whether you are interested in selling your gold jewelry, or interested in learning about gold for investment purposes, a good source is The World Gold Council’s online list of frequently-asked questions.
Gold is scarce. You read here about tons of gold, which is deceiving. Gold has a specific gravity of 19.3, meaning that it is 19.3 times heavier than water. So gold weighs 19.3 kilograms (42.46 lbs) per liter. The world produces a cube of gold that is about 4.3 meters (about 14 feet) on each side every year. In other words, all of the gold produced worldwide in one year could just about fit in the average person’s living room! If you could gather every scrap of gold that man has ever mined into one place, you could only build about one-third of the Washington Monument.