Examining the Long-Term Benefits of Gold Investing

Reckoning today from Buenos Aires, Argentina…

We don’t go in for daily numbers, Fellow Reckoner. They’re too volatile. Too capricious. Too whimsical. One minute, stocks are on an upward tear. The next they’re crashing down again. Then you take a step back and realize the chart you’re looking at tracks movements by the fractions of a point. It’s like watching footage from a tiny camera, strapped to the back of an ant…at an IMAX theatre. Comfortably navigable ground suddenly becomes a terrifying terrain of Himalayan proportions. Who needs the headache, the vertigo or the motion sickness?

A nose-on-screen perspective is fine – necessary even – if you are day trading in and out of stocks…but your editor has neither the discipline nor the stomach for such demanding activity. Besides, it’s hard to really glean much from a second-by-second analysis of events. The sheer amount of information is simply too much for the human brain to process, much less to arrange in any meaningful kind of pattern.

The price of gold, for example, might have been cheap a few minutes ago…when compared to the price a few more minutes ago. Then, compared to the price yesterday, it’s cheaper still. About $8 bucks cheaper an ounce. (And even that number will have changed by the time you read this.) But so what? One year ago, you could have bought an ounce for about $180 less than today.

That would seem to make today’s price expensive, no? But wait. Five years ago, you could have bought two and a half ounces for the same price it costs you to buy just one today. And ten years ago, you could have bought five and a half ounces. Does that make gold cheap, or expensive? A buy, or a sell?

It depends on your perspective. We’ve all wished we could go back in time and buy ’90s shares of Apple, acres of unpopulated beachfront and unloved ounces of gold. Alas, time marches in one direction and one direction only. So where will gold be tomorrow…a year from now…next decade?

Central bankers seem to be betting on a higher price – perhaps a much higher price – in the months and years ahead. Perhaps they’re looking at the divergence between the paper gold market – largely dominated by exchange traded funds and futures – and the physical, stuff-you-can-touch-and-feel market. Reads the April letter from Sprott Asset Management (courtesy of Dave Gonigam over at The 5- Minute Forecast):

“Although the paper gold price has been range-bound over the past month, the physical gold market has been undergoing staggering change…

“It was revealed,” write Eric Sprott and David Baker, “that Hong Kong gold imports into China totalled nearly 40 tonnes in the month of February, representing a 13-fold increase over the same month last year… There isn’t a physical market on Earth that can withstand that type of demand increase without higher prices over the long run.”

Adds Dave, always hard on the story for The 5’s loyal readers, “And that’s not a one-off event; Chinese gold imports during the last eight months have grown nearly eight-fold year over year. And as we noted a few days ago, China’s hardly alone: The IMF says 12 countries bought 58 tonnes last month – with Mexico, Turkey, Russia and Kazakhstan leading the charge.”

“Meanwhile,” continues Dave, “Cheviot Asset Management reckons for every one bar of physical gold, there are 100 open positions in the ‘paper gold’ market.”

“The paper market for gold can continue its charade,” conclude Sprott and Baker in their report, “but demand in the physical market will soon overpower it through sheer momentum – there’s only so much physical to go around, and it appears that there are some very large buyers that are eager to take it.”

We have no idea where gold is ultimately going, Fellow Reckoner…only that, throughout history, the Midas Metal has proved a tremendously successful insurance against central banker folly. That’s a fact onto which even the central bankers themselves appear to be cottoning. Don’t let them beat you to the punch.


Joel Bowman
for Markets and Money

From the Archives…

How to Use Preference Shares to Become an Absolutist Investor
2012-04-27 – Nick Hubble

Why Politicians Can’t Solve Economic Problems
2012-04-26 – Bill Bonner

2012-04-25 – Greg Canavan

Investor Choices – Do You Have a Lifeboat or a Bottle of Brandy?
2012-04-24 – Tim Price

A Bankrupt Idea Whose Time Has Gone
2012-04-23 – Dan Denning

Joel Bowman
Joel Bowman is managing editor of Markets and Money. After completing his degree in media communications and journalism in his home country of Australia, Joel moved to Baltimore to join the Agora Financial team. His keen interest in travel and macroeconomics first took him to New York where he regularly reported from Wall Street, and he now writes from and lives all over the world.

Leave a Reply

1 Comment on "Examining the Long-Term Benefits of Gold Investing"

Notify of
Sort by:   newest | oldest | most voted
Peter Dykes

If I call the Australian socialist gubinment a lot of myopic,self-seeking ,drongo, village idiot ullages, is that discrimination?

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to letters@dailyreckoning.com.au