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My 13 Reasons Why Gold Still Has Further to Go

Claus Vogt | Wednesday, January 26, 2011 at 7:30 am

Financial history teaches that market prices are not just subject to cyclical fluctuations — mainly following the business cycle. They are also liable to much longer lasting secular trends, often spanning 15 years, 20 years or longer. These secular cycles are visible in stocks, commodities, bonds and precious metals. Take gold as an example … Gold experienced a secular bull market starting in the late 1960s and culminating in a spectacular high in 1980. What followed was a severe secular bear market lasting roughly 20 years. Then, around the turn of the millennium, another secular bull market got going. I believe gold’s current secular bull market probably has much further to go. And since bull market corrections are buying opportunities you should use them as such. That might sound easier than it is to do. Buying into nerve wrenching corrections can be a tough pill to swallow. But it’s much easier if you have some strong arguments at hand. Let me give you 13 of them:

Reason #1

A Global Debt Crisis Has Broken Out

No matter where you look — Europe, Japan, or the U.S. — the same dire picture shows up: Mountains of government debt plus larger mountains of unfunded liabilities. Many of the modern welfare state’s promises will be broken sooner or later. The easiest way to kick this can down the road is by printing money. The second option is outright default … In that case government bondholders would have to bear the losses. This is a much more honest and evenhanded way of dealing with the inevitable, because those who have willingly taken the risk of lending money to over-indebted governments and have received interest payments as long as the going was good should bear the losses if things turn sour. Unfortunately our political elite seem set on averting this outcome at any cost.

Reason #2

The Quest for a Weak Currency Has Become Respectable

Not too long ago most economists and even everyday people knew that economic development and the creation of wealth went hand-in-hand with a strong and strengthening currency. This knowledge seems to be lost. A global currency war has started; sabotaging thy neighbor’s policies via currency depreciation is common. Gold is insurance against this loss of relative wealth on an international scale.

Reason #3

Derivatives Are Hanging Like a “Sword of Damocles” over the Financial System

Derivatives have grown exponentially during the past 20 years. They have yet to withstand a real stress test. The panic after hedge fund LTCM went bust in 1998 or the case of AIG may be harbingers of what to expect.

Reason #4

U.S. Fed Chairman Bernanke Is a Stated Inflationist

Fed chairman Bernanke has no qualms in keeping the printing presses rolling 24/7.

Alan Greenspan, Ben Bernanke’s predecessor as Fed chairman, tried to cultivate an image of being a sound money advocate. Covertly he did the exact opposite! Not so Mr. Bernanke … From the beginning of his career as a central banker he has openly declared his clear convictions as an inflationist. For him the printing press is the universal remedy of each and every economic problem as he made clear in his famous November 2002 speech: “Deflation: Making Sure It Doesn’t Happen Here.”

Reason #5

The Current Monetary System Has Entered Its Endgame Phase

History shows that monetary systems are mortal. They come and they go. The current system of fiat money backed by government monopolies has been in existence since August 1971. And it’s a huge economic experiment, probably the largest since communists took over Russia in 1917. The weaknesses of this monetary system, especially the ease of government manipulation, are getting more obvious by the day.

Reason #6

Markets May Force the Return to a Sound Monetary System

When confidence in a monetary system is lost, it is very difficult to regain it. A disappointed and deceived population won’t fall for the same political promises that were just broken. They’ll insist on something reliable. If this were to happen, gold would naturally reemerge as the basis of a new and sound monetary order. This reasoning may actually explain why gold is still in the coffers of most central banks, even the Fed’s.

Reason #7

Gold Is Coming Back as an Asset Class

Globally, gold holdings make up only 1 percent of all financial assets. Not too long ago 5 percent to 10 percent was typical for conservative investors. And most institutional investors are totally out of gold. With the above mentioned problems gaining more and more publicity gold may see a revival as an asset class.

Demand for gold in emerging markets is exploding.

Rising gold prices have also sparked interest. And the introduction of ETFs has paved the way for individual investors to easily add gold to their portfolios … even their IRAs.

Reason #8

Growing Emerging Market Wealth Leads to an Increase in Gold Demand

China, India, Brazil — the largest emerging economies — are booming. And it looks like a durable long-term shift to more growth and wealth has emerged. Consequently, investment and jewelry demand for gold are also growing. Plus, China has step-by-step allowed its citizens to buy the precious metal.

Reason #9

Central Bank Bureaucrats Are Rethinking Their Stance

Global gold supply did not match demand in the recent past. Sales by central banks filled the gap. But now, with rising gold prices, central bank bureaucrats have started to rethink their stance … Most have actually stopped selling. And those of emerging economies — India, South Africa, China, Russia and Argentina — have started buying relatively huge amounts.

Reason #10

Gold Mining Production Is Stagnating at Best

Despite rising prices, gold mining supply has hardly budged during recent years. The easy to exploit mines — the huge deposits — are already in production. In short, it’s getting more and more difficult to find enough new gold.

It’s becoming more difficult and more expensive to mine gold.

Reason #11

Gold Mining Is Getting More and More Expensive

It’s not only getting harder to find new exploitable deposits, it’s also costing more to get the metal out of the earth. The most important factors of production are becoming more expensive, especially energy, the same for manpower in emerging countries. Environmental costs are also soaring. Plus miners have to use more expensive technology for extracting gold from difficult locations, since the easy ones, as noted above, are already in production.

Reason #12

Gold Is Still Cheap

The global money supply has increased dramatically during the past decade, especially since 2008. And if you use money supply as a reference to value gold, the precious metal is still very cheap. For example, if M1 were taken as the basis of a new 100 percent gold standard monetary system in the U.S., gold’s price would be anchored at $6,910 per ounce. The same reasoning for Euroland gets us to €13,628 per ounce using Europe’s M1 money supply. Relative to other asset classes gold is also cheap. The Dow to gold ratio is currently at 8.3. Historically it has been as low as 1 and even lower.

Reason #13

The Current Secular Up Trend Has More Leeway

During secular bull markets prices usually go up by a factor of at least 10 to 15. Just think, during the last secular bull market the Dow rose from 800 in 1982 to 12,000 in 2000. Same thing for gold during the 1970s: From $35 per ounce to $850. And based on all the reasons I’ve given you today, gold’s current bull market should achieve similar magnitude. Of course, there will be corrections along the way — even cruel ones. To give you an example: In 1974 gold declined more than 40 percent. But since the drivers of that bull market were still valid, even that slump turned out to be a buying opportunity. Make sure you don’t miss this one!

Best wishes, Claus