Gold bullion – an essential part of one's investment portfolio

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Suddenly, as the price of gold is showing signs of strength again, analysts from many major financial institutions are talking about prices going to $1300 per ounce and higher. Yet, a few weeks ago, when the gold price was trading down, they were talking about lower prices in gold.


Being able to correctly predict future prices of any commodity is one thing, giving a commentary on the current trend is another. As far as I am concerned I don't know who these analysts are and don't much care either. They all seem confused and unable to see that the primary trend is upwards and that there are certain fundamental reasons why this happening.

Many individuals still have the misconception that gold is used only for jewellery, and have forgotten that gold is also a monetary metal as well as a global currency. It is not a barbaric relic as it is often referred to by analysts who don't understand this metal.

Gold has always had value to humans, even before it was money. This is demonstrated by the extraordinary efforts made to obtain it. Prospecting for gold was a worldwide effort going back thousands of years, even before the first money in the form of gold coins appeared about 700 B.C. The first pure gold coins were struck by King Croesus of Lydia (present-day Turkey) during his reign between 560 and 547 BC and gold coins have continued as legal tender ever since. It changed the world of commerce as the yellow metal became a currency – a medium of exchange with a definite value – replacing barter and other commodities as money.

By the early 1970s, as the costs of the Vietnam War and increased domestic spending accelerated inflation, the U.S. was running a balance of payments deficit and a trade deficit, the first in the 20th century. By 1971 and as a result of the US government printing more dollars, holders of the greenback began to lose faith in the dollar and in the U.S. government's ability to cut its budget and trade deficits. And, because of the excess printed dollars, and the negative U.S. trade balance, other nations began demanding fulfillment of America's "promise to pay" – that is, the redemption of their dollars for gold. Switzerland redeemed $50 million of paper for gold in July. France acquired $191 million in gold, further depleting the gold reserves of the U.S.  And, the dollar continued to drop in value against the European currencies.

To stabilize the economy and combat runaway inflation, on August 15, 1971, President Nixon imposed a 90-day wage and price freeze, a 10 percent import surcharge, and, most importantly, "closed the gold window", ending convertibility between US dollars and gold. The President and fifteen advisors made that decision without consulting the members of the international monetary system, so the international community informally named it the Nixon shock. Thus ended the Bretton Woods dollar-gold convertibility and the introduction of a currency system known as fiat currencies whereby the value of currencies, the US dollar in particular, was no longer based on gold but instead on projected future value that was predominately dependent on interest paying financial transactions.

The current world monetary system assigns no special role to gold and the US Federal Reserve is not obliged to tie the dollar to anything. It can print as much or as little money as it deems appropriate and the Fed is free to respond to actual or threatened recessions by applying the appropriate monetary policy.

Monetary policy is the process by which the monetary authority (usually the central bank) of a country controls the supply of money, often targeting a rate of interest. Monetary policy is usually used to maintain growth, stability, low unemployment and stable prices of the economy.  An expansionary policy is traditionally used to stimulate economic growth and to combat high levels of unemployment in a recession.

An expansionary policy can be implemented by increasing the money supply (printing more money). It may also be implemented by allowing banks to hold a lower proportion of their total assets in reserve. Banks only maintain a small portion of their assets as cash available for immediate withdrawal; the rest is invested in illiquid assets like mortgages and loans. By requiring a lower proportion of total assets to be held as liquid cash the Federal Reserve increases the availability of loans. This acts as an increase in the money supply. And, the expansion of the monetary supply can be achieved indirectly by decreasing the nominal interest rates.

Now you don't have to be a rocket scientist to see that in today's economic climate, it is very unlikely that banks are going to be allowed to hold smaller reserves and that it is going to be difficult to reduce interest rates for much longer as they are already close to zero. Therefore, central banks will have no option apart from printing more money. And, the consequence of this is going to be a debasement of their national currency as well as an era of high inflation.

It has been proven that in times such as these precious metals such as gold and silver are the best ways to protect ones wealth and that is why it is important to allocate a portion of your funds to these metals. Gold has always been and will continue to be the asset of last resort. While national currencies have come and gone, gold's value has remained remarkably stable. Gold is an asset which does not depend upon any government's promise to pay. It is not directly affected by the policy actions of any individual country and it cannot taken away or frozen as in the case of many other assets.

Gold is amoung the most liquid assets in the world. It can be readily bought or sold 24 hours a day in one or more markets around the world. Market makers, bullion dealers, coins dealers, as well as some banks trade gold with each other as well as with their clients. The main centers of the gold market are London, New York, Zurich with other smaller centers in Singapore, Hong Kong, India, and Dubai. Each day, mining companies, central banks, jeweler manufacturers, refineries as well investors and speculators do transactions through these centres. The typical deal size for a gold transaction between market makers will be between 5,000 and 10, 000 ounces so unless you are able to do transactions for these amounts don't quibble about the premium you pay when you buy one Krugerrand.

Then, of course there are the futures markets. Although these markets are "paper-markets," as only a very small percentage of deals ever get settled by physical delivery, the volumes far exceed those traded on the physical markets and therefore have a huge impact on the spot prices. The largest of the gold futures exchanges are the Comex division or the New York Mercantile Exchange, the Chicago Board of Trade or CBOT, the Tokyo Commodity Exchange (TOCOM), The Multi Commodity Exchange of India (MCX), The Dubai Gold and Commodity Exchange (DGCX), The Chinese Gold and Silver Exchange Society in Hong Kong, The Istanbul Gold Exchange and The Shanghai Gold Exchange.

We are in very uncertain economic times at the moment, and while I don't see a complete collapse in the current fiat system of currencies, I do believe that we are going to see further devaluations in these currencies in particular the US dollar and the euro. The problem with this is that since the US dollar is the world's reserve currency, the ramifications of a declining dollar will be felt globally. And, as this happens the price of gold is going to move higher. In addition to being a global currency, it is also a barometer of the macro economic climate which at the moment is not very good.

It is therefore prudent to take precautionary measures against what may happen over the coming years, and one way to do this is to accumulate gold. And, the best way to do this is to own physical gold in the form of bullion bars and bullion coins.

TECHNICAL ANALYSIS

The price of gold has had an impressive move to the upside since the end of July trading from $1155/oz to just over $1260/oz. After this move of 9% the price may consolidate between $1240/oz and $1260/oz before it breaches the key resistance level of $1265/oz to establish a new historic high. 

About the author

David Levenstein is a leading expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.

His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.

David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.

For more information go to: www.lakeshoretrading.co.za

Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.

If they really needed cash they could have gotten it.  The amounts they are raising are insignificant.  The real purpose in my opinion was to continue the Gold suppression effort.

The Washington Agreement where central banks were allowed to sell 500 tonnes of Gold per year was failing.  Central Banks are accumulating Gold now, not selling as before and the IMF decided/had to step in.

Gold is still rising despite these efforts and will continue to.  Gold's rise will only accelerate in the months and years to come as less and less supply is for sale and more is being bought.

Chinese Gold output slipped 5.8% year over year in July.  July 2010's number was also 2.6% below June's 31.897 tonnes.  They are still far and away the leading Gold producer having produced 190.298 tonnes in 2010 through July, up 10.08% from 2009 levels.  That's stunning growth no matter what you're talking about.

I've got some other issues to deal with this weekend so I'll cut it short this week.

We should be really getting back to things next week now that the kids are all solidly back into school and everyone is back from vacations, at least I hope.

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