Got Gold?
Get Gold!
The Everything Gold Answer Book.
Your Guide to Protecting your Wealth in the 21st Century Gold Rush while Riding the Golden Bull and the Silver Stallion.
by
Jerry Western
SMASHWORDS EDITION
*****
Copyright 2010 Jerry Western
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*****
Author Legal Notice
/ Disclaimer
This book is not and should not be construed as
an offer to sell or the solicitation or an offer to purchase any
investment. Western Outlook (Jerry Western) has based much of this
book on information obtained from sources it believes to be reliable
but which it has not independently verified; Western Outlook (Jerry
Western) makes no guarantee, representation or warranty and accepts
no responsibility or liability as to its accuracy or completeness.
Expressions of opinion are those of Western Outlook (Jerry Western)
only and are subject to change without notice. Western Outlook
(Jerry Western) assumes no warranty, liability, or guarantee for the
current relevance, correctness or completeness of any information
provided within this book and will not be held liable for the
consequence of reliance upon any opinion or statement contained
herein or any omission. Furthermore, we assume no liability for any
direct or indirect loss or damage or, in particular, for lost profit,
which you may incur as a result of the use and existence of the
information, provided within this book. By purchasing the Got Gold?
Get Gold! book you are agreeing with this notice.
Nothing in this book should be taken as Financial Advice.
Do Not make Investment Decisions based solely on the information presented here.
Do Your Own Due Diligence.
Full Disclosure: The author is not a financial planner and has no interest, financial or otherwise, in your buying or selling anything.
Full Disclosure: The author is long gold, silver, and their associated mining stocks.
All material is copyright ‘Jerry Western’ and ‘Western Outlook’ and may only be reproduced with permission from the author.
Preface
The Gold and Silver markets are rockets primed and ready to explode skyward. All that’s needed is the spark to start the ignition. Nobody knows what that spark will be or when it will come but surely it will come. This book has been written as an attempt to explain, in the simplest and easiest to understand way (I hope), why this is so. As I see it, the ignition and explosion is inevitable and imminent. I’m an unapologetic bull when it comes to gold and silver. After almost six years and literally thousands of articles read, both pro and con, I frankly can see no other outcome than the metals increasing in price, need, and want in the years to come. But imminent shouldn’t be confused with immediate, though immediate is always a possibility and one day will prove true. This spark will probably take everyone by surprise, including myself and those deemed market experts. It could even be a spark that no-one has even contemplated or thought possible. However, I firmly believe that this is one of those rare instances when we can divine the likely direction of a market, though we can never know the timing nor magnitude. But if we play it right, direction is all we’ll need.
When I started on my quest to understand these markets some six years ago, I made the mistake of confusing imminent with immediate. I could see all the signs back then and would never have thought that all these years later the rocket would still be on the launching pad. Surely, I thought, others could see and understand what I was discovering. Not so. I was an early adopter. Just because I could see and understand didn’t mean that a) others were researching what I was, and b) they would come to the same conclusions as I, and c) bid up the metal. The problem is that opinion, consensus, and paradigm shift often happen at a glacial pace. A body of evidence needs to build and many data points need to be collected by the seeker (even if he isn’t sure what he’s seeking) in order to either enlighten the individual or change that person’s opinion or view. It’s like a supertanker turning at sea. It takes a long time to make a U-turn. Opinions and prejudices aren’t often changed or turned on a dime. Since markets are nothing more than aggregated opinions, markets also tend to make very gradual shifts over years or decades. It’s only rarely that we see quick changes in sentiment or opinion. Think of the market crashes of October 1929 and 1987 or the events of 9/11 for examples.
Please keep the above in mind when reading the rest of the book. Just because you are discovering a new data point for the first time doesn’t mean everyone else is or that trend reversal is near (though it could be). Some trends have been moving in a certain direction for decades and it often takes years for markets, trends, or politics to reverse or take on a new direction. Don’t be too quick to jump ‘all-in’ in one direction only to get whipsawed in the other. Construct a long term view. Take the example of one who discovered the Gold Bull Market in mid 2008. It looked great. Gold had been rising every year for 8 years running. Gold was trading at $1000/oz. Then it plunged to less than $700 in a matter of weeks and didn’t recover to 4 digits until many months later. If you were new to the market and you had gone all-in at the intermediate top, you’d have been looking at a loss of more than a third of your portfolio in short order. Would you have had the fortitude to stay long in the market or would you have bailed for a hefty loss? Bull markets advance two steps forward and one step back. Almost nothing ever goes straight up or straight down in the short term. Markets take years to develop. Never be all-in or all-out on a whim. Stay the course for the long haul. To paraphrase the famous trader, Jesse Livermore: ‘The greatest money is made by sitting tight and knowing you’re right.’ A bull market will make up any losses for you over time. It’s probably best to average in over time but I wouldn’t want to not be in the gold market at all at this time.
The generational bull market is now in tangible assets – commodities, energy, farmland, and precious metals among others. Certain individual stocks will advance and the stock indexes may advance over time as well. But they won’t likely keep pace with inflation like commodities will – and you might just make a nice profit as well.
Who am I and why am I qualified to write this book?
I’ve been collecting coins for 34 years and have always had an interest in natural resources, geopolitics, money, ratios and percentages, and current events. I started researching the energy markets and inflation back in 2004 and that quickly led me to the precious metals markets and that’s been my focus ever since. It’s been both a hobby and a passion and I read and research continuously. In 2008 I began constructing a class on gold and silver as real (or honest, or sound, or constitutional) money, and all the implications of being off the gold standard. In 2009, I began teaching classes at local colleges and for local community adult education programs.
I do feel that I’m standing on the shoulders of giants though. While I have contributed my opinion and thoughts in various ways throughout the book, in reality, much of my thoughts and opinion have been formed and shaped by the hundreds of authors I’ve read and am deeply indebted to. My forte is to collect and distill the information I find into a simple, straightforward, understandable text for you, the reader. I have not invented the wheel, nor re-invented the wheel. What I’ve done is to introduce the wheel to a new audience and provide instructions in its use. This book is a compilation of my research of all things gold and silver. By liberally quoting the true gurus of the precious metals community, I’ve tried to bring out the best that those in the know have to offer. I’ve tried to cover the full spectrum of the basics that one needs to know to begin to have a true understanding of the value and power of gold (and silver). And the material within should be a fantastic starting point to learn how to protect your wealth by riding the golden bull.
Chapter 1 The Current Bull Market in Precious Metals
The Current Bull Market in Precious Metals
Why a Bull Market Now?
Commodity Cycles: How Long will the Bull Market last?
Is Gold a Bubble?
Reasons why Precious Metals will Appreciate from Here
How You Can Profit from the Silver and Gold Bull Markets
Why Gold Retains its Value over Time
Gold Attributes
Gold Caveats
Why Own It? The Bull Case
What Good is It Anyhow? The Bear Case
What Gold Is. What Gold is Not. What Gold is Good for
A Golden Timeline: The U.S. and the Gold Standard
United States Gold Reserves
Fractional Reserve Gold
What has Historically been Used as Money
Are Precious Metals Used as Money Today?
The Characteristics of Sound Money
What is Money and Why is Gold so Important?
What is a Gold Standard?
What is a Dollar?
What is Fiat Money?
What is a Federal Reserve Note?
The Federal Reserve
Where do Dollars (Federal Reserve Notes) come from?
The Dollar’s Relationship to Gold
What Gives Money Value?
Currency Heaven
Monetary Inflation and its Effects
Double Trouble
U.S. Government Liabilities
The Road to Ruin: Historic Inflations
Gold in Times of Deflation
Chapter 5 It’s Our Dollar but Your Problem
Bretton Woods and the World Reserve Currency
If Everyone is Against Us, then Who is With Us?
What Happens should the Dollar Fail?
Current Developments and Anecdotal Evidence
The China Factor
Chapter 6 The Precious Metals Markets
Do as They Do. Who’s Buying Now?
Phases of a Bull Market
When’s a Good Time to Buy Gold?
Market Seasonal Factors
Historic Mining Stock Timing Factors
Gold Market Size
Gold Supply, Demand, and Inventory
The Dow:Gold Ratio
Gold in Other Currencies
How High Could the Price of Gold Go?
Signs of a Top for the Precious Metals Bull Market
Silver’s Attributes
Is Silver Money?
Gold versus Silver Performance in a Bull Market
The Silver:Gold Ratios
Metals Comparison: Gold versus Silver: Which is Better to Own?
Chapter 8 Precious Metal Ownership
Types of Metal Ownership
Paper Metal versus Physical Metal
Where can I Purchase Coins?
How do I Know I’m Getting what I Paid for?
Coin Categories and Types
Common Gold and Silver Coins
Premiums: Is it Possible to Buy At or Below Spot Price?
Bullion and Commodities Exchanges
A Buy/Sell Scenario
Where Do You Store Your Precious Metals?
Confiscation Issues and Lessons Learned
Taxes
Reportable Transactions
Holding Precious Metals in Retirement Accounts and IRAs
Jewelry Sales and Cash4Gold
Pooled Accounts versus Allocated Accounts
Companies that Store Metal on Your Behalf
Chapter 9 Precious Metals Equities
Mining Company Leverage
Mining Company Risks
Mine Development and Production
Miners
Mining Companies
Junior Mining Companies
Royalty Companies
Exchange Traded Funds
Precious Metal Funds
Diversify, Diversify, Diversify
Portfolio Allocation per the Pros
Precious Metal Market Indexes
Chapter 10 Summary and Conclusion
Appendix A
A Reading List of Gold Books with Author and Publisher
Appendix B
A List of Links to Articles about the Precious Metals Markets
Appendix C
A List of Links to Articles on the Fundamentals of Gold
Appendix D
A List of Links to Classic Articles on Gold
Appendix E
A List of Links to Articles on Gold Money and the Collapsing Dollar
Appendix F
A List of Links to Articles on the Coming Economic Collapse
Appendix G
A List of Links to Articles on the Economy
Appendix H
A List of Links to Articles about the World Geo-Political Order and Gold
Appendix I
A List of Links to Articles about Gold Market Manipulation and Conspiracy
Appendix J
A Listing of 36 of the Largest and best known National and International Precious Metal Retailers with links to Company Websites
Appendix K
A Listing of 42 of the Most Prominent Gold Advisory Subscription Services and their Websites
Appendix L
A Listing of 35 Recommended Authors who write about Gold and the Websites where you can read their Free Postings
Appendix M
A Listing of 55 Recommended Gold Analysis and Editorial WebSites
Appendix N
A Listing of 26 Recommended Research Sites on the Web. Mining Company Directories, Metal Calculators, Charts, and other goodies.
If you only read or remember or understand one thing from this book, know this: Gold is money. Gold is the ultimate money. Gold is money when all other money fails. No matter what anyone may say to the contrary, the historic record indicates that gold is money and has always been. As the banker J.P. Morgan so famously put it, “Gold is money and nothing else.” This quote can be taken in one of two ways. The first is that the primary function of gold is as money and that that is its only or most important function. The second is that gold is money and nothing else is, or that nothing else functions as money as good as gold. No matter how he meant it, he was correct. Gold is money and nothing else.
If you really understand that gold is money, that is all you really need to know, and you know what it is you need to do to protect yourself financially at this time. If not, the remainder of this book will try to convince you of the importance of gold and then you’ll know what you need to do, that is, to get yourself some gold.
Therefore, if you do understand that gold is money and you own none, put down this book and go get some. If not, read on.
The Current Bull Market in Precious Metals
“The Trend is Your Friend and the Trend in Gold is Up.”
Jerry Western
The Current Bull Market in Precious Metals
The world is currently in the midst of a bull market in precious metals. Gold has been in a bull market in U.S. Dollar terms since at least 2001 (as has silver and the other precious metals). Furthermore, the advance has not been limited to the U.S. Dollar price, but is present in all major world currencies, and seems likely to continue for some time. As no market moves in a straight line, bull markets are characterized by a succession of higher price highs and higher price lows, moving from the lower left to the upper right on a chart; two steps forward – one step back. But it is definitely a bull market.
That much we know.
Thus, the obvious questions we all seem to want answers to are three:
Will the bull market in precious metals continue from here?
If so, how long will it last?
and
At that time, what will the ultimate high reach before the inevitable bear returns?
In short, these answers are not conclusively knowable as the future is uncertain. However, we can make inferences and educated guesses by looking at the past and surveying the present. After all, history tends to rhyme and there is nothing new under the sun.
A good deal of the content of this book is dedicated to providing possible answers to these questions by surveying the current circumstances, and examining the voluminous evidence, of this ongoing bull market in precious metals.
Why a Bull Market Now?
First and foremost, since gold is money, it competes directly with currency, and is highly negatively (or inversely) correlated with the dollar and every other fiat currency (hint: all of them) in the world. Thus, holding gold is a hedge against the falling value of the dollar via inflation of the money supply. On a related note, the U.S. dollar is losing its status as the world reserve currency which will also exacerbate the inflation of dollars domestically at some point. More about this later.
One needs to understand why an individual would desire to hold precious metals for the long term. For 5000 years of recorded history there have only been two things that people have consistently and continuously used as money: gold and silver. The main reason they have done so, and continue to do so, is because gold and silver act as a store of value. Each retains its value (read: purchasing power) over long periods of time; the more uncertain the economic times, the more the desire for safety. People become more interested in keeping what they have rather than in speculating. We are in the midst of uncertain economic times on both a national and a global scale.
There is now unprecedented continuous global currency debasement occurring due to worldwide reflationary policies in place attempting to stimulate economic growth and head off recessionary or depressionary forces. This is highly gold price positive.
Another huge factor is that precious metals are negatively correlated with all other major investment sectors. As the stock and housing markets have deflated, the metals have benefitted.
These are but a very few of the overarching circumstances present as the catalyst for this gold bull run. Much more is covered in sections to follow. In fact, this entire book is constructed as an argument for owning gold and there’s something in each section that furthers that argument.
Commodity Cycles: How Long will the Bull Market Last?
All markets tend to fluctuate from bull to bear (or bubble to bust if you prefer) and back again over varying periods of time and for various reasons. Certain market sectors may be in alignment (stocks and bonds 1982-2000) at any given point in time or may be traveling in opposite directions, in a big picture/long term sense, spanning years or even decades. Those sectors traveling together are said to be positively correlated while those in opposition are said to be negatively correlated.
The dollar and gold normally move in opposite directions. When the dollar moves down, gold is normally up and vice versa. This has been a normal cycle. The dollar has been in a down trending market since the turn of the century. With dollars being created far in excess of expanding productivity and population, this trend seems likely to continue as each dollar created in excess degrades each existing dollar. Excess dollar creation has increased immensely in recent years. In actuality, it’s not the value of gold which is increasing, it’s the value of the dollar that is decreasing, thus necessitating more dollars to purchase a set amount of the metal. The metal doesn’t change over time. It just is.
The last bull market in gold and silver lasted from 1971 until 1980. However, the price of gold was fixed at $35 per ounce until 1971. One could make a case that it started years earlier. The subsequent bear market in gold lasted about 2 decades, until the present bull began. The precious metals tend to run in sync with the general commodity cycles. Commodity cycles tend to last 15-20 years and sometimes up to 30 years. One reason for these cycles in commodities is due to the peculiarities of the mining industry.
Dr. Thomas Chaize has identified a 32.75 year cycle between production peaks in gold. Once a commodity deficit is recognized in the markets, production can’t simply be increased quickly or easily. It takes 7-10 years for a promising piece of property to become a producing mine. By the time these mines are financed and built, the cycles is often turning and all of the new mines now create an over-supply and the market goes into a bear phase. This is one way to predict the length of a bull market. There are others.
Another is to measure the low-to-high price of gold during the last bull market. The price rose from $35 per ounce at the beginning of the seventies to $875 per ounce in January 1980. That’s a 25 fold increase in price. The lowest low of the 1980’s/1990’s bear market was $255 (+-$1). Multiply that figure by 25 and see that this bull market may not be over until we reach or surpass $6375. Though only time will tell, this writer is of the opinion that we’ll surpass that figure this time around for reasons presented in this book.
How long will the bull market last?
Let’s let the experts tell us what they think.
“If you are a regular reader of my articles, then you know that I have been continually preaching the commodity pendulum. This is a series of massive swings in commodity prices (each lasting 10-20 years). The first swing was down (in real terms) from 1963-71. The second swing was up (in both real and nominal terms) from 1971-1980. The third swing was down again (both real and nominal) from 1980 to 1999. And the fourth swing was up (both real and nominal) from 2001 to the present.”
Howard Katz “Commodities -- On the Move” 10/26/2009
“Note that Gold rose about six-fold the first eight years into the bull market (it began in 1970). Ultimately it rose 25-fold. The Nasdaq from 1982 to 1992 advanced about four fold. Ultimately it rose 29-fold. The Nikkei advanced less than three fold from 1970 to 1978. From 1970 to 1990 it gained 19-fold. Gold is nine years into its bull market and has advanced less than five fold. See a pattern here?” Jordan Roy-Byrne
“…a minimum 16 yr. bull market.” Aubie Baltin
“If we measure gold in terms of its increasing purchasing power, we are only in about the third year of a 20-year run.” Bob Hoye
The nature of cyclical bull markets is that there occurs a ‘blow off’ top at the completion of the bull move (Think Nasdaq circa 1999-2000). This means that the big gain comes in the latter stages of the bull. We’ve seen minor blow-offs in this bull but the big one should be ahead of us.
Currently, there has been no ‘recognition move’ yet. The masses are still fast asleep. One day there will likely be a move to the upside in price that gets mass (media) attention. That move will likely be the beginning of the final move but that move may take months or years to complete.
This gold cycle shows no signs of doing anything but continuing. In fact, it is strengthening as it progresses.
Is Gold a Bubble?
Is gold a bubble like the real estate and dot com bubbles of the last two decades?
No. Gold is not a bubble at present (mid 2010) but likely will be at some point. The current bubble is in the dollar and the bond market. The U.S. government is artificially propping up both markets and has been doing so for some time. It swaps currency with foreign governments to purchase dollars on the Forex market and it has purchased more than half of recent bond offerings. Your government works diligently to prop up the value of the dollar, bond, treasury, and stock markets while suppressing the commodities markets. While the dollar price of gold has been steadily rising for over a decade, it is nowhere near being a bubble.
According to Davos Sherman Okst, in his writing “What’s in Your Wallet?”, June 24, 2010,
“0.8% of all global financial assets are invested in gold, gold shares, and ETFs. In 1932 it was 20%, in the 1980s 26%.” And “TODAY? .8% POINT 8 Percent!” He goes on to say,
“IF 2% were allocated today, demand would amount to the total global mining output of 34 consecutive years. Gold in a bubble? I seriously don't think so.” Bravo Mr. Okst!
Others have posted similar numbers. John Hathaway, Manager of the Tocqueville Gold Fund finds that the market cap of all above ground gold equals about 6% of global financial assets. In 1934 and 1982 he finds that it was between 20%-25%. Commentator Jordan Roy-Byrne says that market cap of all gold and gold assets was 15% in 1934 and 29% in 1980. Then we hear James Turk, founder of Goldmoney, telling us that in 1900 40% of invested money was in gold but today only about 1-2%.
Notice that most of the above commentators mention dates in the early 1930s and the early 1980s. What was happening back then? Of course, these were times of economic stress and uncertainty. The so-called Great Depression was going on in the 30s and the early 80s were right at the end of the last great inflation which coincided with the last great gold and silver bull market. People were putting a relatively large portion of their investable assets in the metals. They were doing so because of the protection and safety that the metals offered. The stock markets were in retreat in both these eras. People were afraid of losing what they had. They wanted safety and the metals provided it for them. This is what’s going on in today’s gold market. We have the same setup. I would guess that by the end of this current bull market we’ll see similar percentages of wealth invested with the metals.
The above is a comparison of gold over time. Let’s look at the current gold bull market versus stock bull markets. We’ll start with a couple more quotes. The first is from Barton Biggs, from his book, Hedgehogging.
“In fact something like 80% of all the public money that was invested in mutual funds at the height of the bubble in the spring of 2000 went into tech funds.” Wow. Remember that Nasdaq Tech Bubble of the late 90s? The public was really into that one. Where’s the public in today’s gold market? Nowhere to be seen. How can we have a bubble with the public?
Gold Market Commentator Andrew Mickey recently wrote:
“And they’re certainly not even close to the 48% of all Americans owning stocks at the height of the stock bubble in 2000.” Do 48% of the people you know own any form of gold? I’d say we have a long way to go.
People are selling gold (i.e. Cash4Gold) not buying it. That’s the opposite of a bubble. Let me repeat, Americans are selling their gold at ‘gold parties’ not buying it. Someday they will – at the top – just like during the tech/internet mania – but not yet. In a later section, I’ll be discussing signs of a top (bubble). None of those signs are evident today.
Reasons why Precious Metals will Appreciate from Here
This section is meant to be quick overview of prominent factors causing this gold bull run. It is certainly not exhaustive and most of the following is discussed in much greater detail in subsequent chapters. Here’s a sampling of some quick facts. Briefly…
Commodity Bull Markets tend to last 15 to 20 years. We’re only in about the ninth or tenth year.
The biggest gains normally come at the end of bull markets. While we may be more than half way through, the greatest percentage gains are ahead.
Investment demand continues to rise in volume and percent. Gold investment demand increased 64% in 2008 and 118% in the second quarter of 2010. Retail investment demand was up 400+% in 2009 according to the World Gold Council (WGC).
Precious metals are in a bull market in all major world currencies.
The market capitalization of all above ground gold as a percentage of global financial assets is currently in the low single digits. During past times of economic turmoil, the percentage has been 20-40%.
There is an ever more obvious shortage of physical gold and silver – both bars and coins.
We’re in the middle of a general commodities upswing.
There has been a surge in open interest since mid-March 2010 in gold futures contracts.
Investment demand is now overtaking jewelry demand as the most important or dominant demand (World Gold Council).
There has been backwardation at the bullion exchanges. This is the first time this has happened in decades. It means that people want to take delivery of their metal sooner rather than later. Silver spent 47 straight days in Backwardation in 2009.
Delivery and supply issues on the precious metal commodities exchanges.
Worldwide economic disruption and monetary reflation currently underway.
The need to diversify excessive global foreign exchange reserves.
Nations are increasingly outspoken about the need to replace the dollar as the world reserve currency. Not only that, they’re taking action.
Foreign nations are increasingly losing their desire to buy U.S. Treasuries (or are not able to). In fact, they’ve become net sellers with the Federal reserve picking up the slack.
Half of U.S. States and the Federal Government are technically bankrupt.
Half of U.S. Homes are underwater. The broadest measure of unemployment is over 22%.
Many gold and silver mines were closed for good during the last downturn in gold and silver and have yet to be reactivated. Supply is flat and mining costs are increasing.
The World’s Central Banks have stopped selling gold and are now buyers.
The vast majority of people still have not invested in precious metals.
Fractional Reserve Gold.
Negative real interest rates.
U.S. Deficit of 13+% of GDP for 2009. (CBO)
Unfunded pension and health-care liabilities are over $99 Trillion. (Richard Fisher, president of the Dallas Federal Reserve Bank)
Credit agencies have issued alerts regarding the U.S. AAA credit rating.
There are many more reasons, and too numerous to list all of them, but you get the picture.
It’s not just the United States pursuing a policy of currency debasement. All other nations are on the same path. The result is that there is more than ten times the currency circulating world-wide than there was in the 1970's. This currency has to go somewhere. It went into the stock markets and then to housing and is still in U.S. debt. It’s becoming more apparent that much is beginning to flow into precious metals. During the 1970s gold bull run, most of the global population had no way of participating. Those in the Communist Bloc did not participate. Only the U.S. and Europe, and to a lesser extent the Middle East, pushed gold and silver prices to the, then, all-time highs.
This time the entire world is participating. The global population is roughly double what it was then and probably 5 to 10 times more people have the ability to invest in the metals.
Because of globalization, the need to beat currency inflation, and the Internet, people now have a propensity to invest and speculate. They also have the ability.
As more and more people turn to gold and silver to protect their wealth, they will push the metals to greater heights than seen the last time around. By positioning yourself accordingly now, you will be in a position to protect yourself and quite possibly profit as well.
How You Can Profit from the Silver and Gold Bull Markets
Let’s assume that you’ve come to the conclusion that gold is indeed in a bull market (it has been for 10 years now) and that it will continue. Then how can you get in on the action while the bull still reigns?
First and foremost: Buy and Hold on. A bull market will rise over time. Should your timing be off and you buy at an interim high, the bull will bail you out eventually. You can safely take the plunge at any item before the bull exhausts itself. Remember the adage of Dollar Cost Averaging in the stock market? Well, the same applies to any bull market. Invest a set portion of your funds on a regular basis and eventually your average buy-in price will be lower than the market price in a rising market.
Try to time the market. You know it’s a bull market and that it is going to rise. Two steps forward and one step back. There are plenty of subscription services and free commentary on the Web to assist you with your timing in buying and selling.
Be the middle man. Since buying and selling activity is increasing as the bull market progresses, you can take your cut of the increased action, whether at gold jewelry ‘parties’ or the buying and selling of coins. There is always a spread or premium in every transaction.
Buy precious metal mining stocks or Exchange Traded funds (ETFs) that invest in and hold the metals. This option should only be pursued with expert guidance and knowledge. Mining issues are very volatile in both directions.
Work for a mining company, bullion supplier, or coin shop. Remember, it was the suppliers who got rich during the California and Alaska Gold Rushes for the most part. Those who sold the implements for mining often acquired greater riches than those who did the actual prospecting.
Mine it yourself. Small scale prospecting has really taken off the last couple of years with rising prices. While most gold and silver is mined in the Western United States, there are minable deposits in certain areas of the East. Browse the Gold Prospectors Association of America (GPAA) website at goldprospectors.org to find out more. At the website, surf over to the Lost Dutchman’s Mining Association page. The LDMA members have rights to prospect certain claims.
Educate yourself and others. The more educated you become about the gold market, the more ideas you’ll have on how to profit. By educating others, you’ll become the go-to person for queries from friends, relatives, and acquaintances. You’ll then act as an intermediary, for a profit, to help them with their own research and purchases.
“Gold is money and nothing else.”
J.P. Morgan
Why Gold Retains its Value over Time
Gold retains its value because of its inherent scarcity, whereas dollars can be created in unlimited supply. Gold retains its stability of value over time due to its occurrence, or supply, in nature and the rate at which it can be mined. Both the annual rate at which gold is mined in relation to existing supply, and the rate of increase in world population, regularly fall within the 1% to 2% range. Go back a half century and you will find that there was then, as there is today, approximately ¾ ounce of above ground (mined) gold in existence for each human on earth. This ratio remains quite constant over time because of the similarity in the two rates of increase.
Gold Attributes
What are some of the attributes that makes gold so special? After all, it’s just number 79 on the periodic table of elements – only one of over a hundred known elements. Why gold?
I used to think that an element, mineral, or commodity had to be useful or beneficial in some other way to be prized as an asset to hold. After all, if it has no use then why hoard it? For example, water is needed (for all life), hoarded (think dams and reservoirs), and coveted (ask any farmer who irrigates or beachfront property owner).
There’s a concept in urban planning called ‘best use’ of a property. For instance, a steeply sloping property with swampland and a river flowing through it may be best suited to be parkland. Sure, you could build houses on it with great effort and expense but there’s cheaper and better suited land nearby for that purpose. It could be turned into a garbage dump but undesirable chemicals would leach into the wetlands and river and perhaps into the drinking water. You get the idea. Each parcel of real estate has a best or better user for it. Not that the best use always happens but most would agree that one use would be better than another.
It’s the same with metals, only sort of backwards. Most elements and metals are used in many and various applications. However, each need for material has a particular element, metal, or commodity that works best. Why are aircraft bodies made primarily of aluminum? It’s because aluminum is the best suited for that use. It’s the strongest, cheapest, and safest material to use. Can substitutes be used? Sure. Fighter jets are made of titanium instead of aluminum because it’s more rugged and can survive the G-forces better and enemy fire too. Could 747’s be made from titanium? Sure they could, but at much greater and prohibitively expensive cost. Palladium is used in automobile catalytic converters. Silver is used for most mirrors. There are substitutes for both but these have been found to best suited for that purpose over time.
Now I ask you, what’s the best material or substance to be used as money? Why it just so happens to be gold. Yes, gold is used for jewelry, dentistry, gold leaf, electronics, and other purposes but its best use is as money. Each of the above uses has one or more substitutes anyhow.
Why is gold’s best use as money? Well, partly because it’s Durable, Divisible, Easily Recognizable, Highly Liquid (financially), Hard to Counterfeit, Easily Portable, Relatively Rare, Non-Toxic, Beautiful, Compact, Unchanging, An Honest Measure, Won’t Rust, Decay, or Burn, Convenient, Fungible, Holds its Value over Time, and Is Anonymous. Oh, and it’s hard to come by, is extracted from the earth at great expense and hardship, and historically increases in supply at about the same rate as population expands.
But you know what? None of that really matters in the end. What does matter is that it is Desired and Coveted by others. Other people want it and are willing to trade goods and services for it. It doesn’t really matter why they want it – just that they do and always have. As long as human nature does not change (and it never has), gold will always have value to people and thus will always be money.
Here are some other attributes that make gold special.
Gold is the only major asset class that is negatively correlated to all others (i.e. Bonds, Equities, Real Estate, Cash). (Ibbotson Associates, 2005). When the stock markets are on a bull run and housing is booming you may not want to be all in gold. But when most of the other markets are down or sideways (since the turn of the last century), gold is normally increasing in price.
Gold does well in both Inflationary and Deflationary environments. (The Golden Constant; Jastram, 1977) The 1930’s was a time of deflation and the 1970’s was a time of inflation. Gold did well throughout both those decades.
Gold is the most Conservative investment one can make – more conservative than cash or bonds. This fact isn’t widely known. Author and investor Stewart Thompson calls it the “World’s Lowest Risk Investment.” When I say conservative I’m not saying that it always makes you the maximum dollar gain. Not so. What I’m saying is that its value can never fall to zero. There’s always a demand for it in bad times and in good. Your dollars can lose value over time and even become worthless. They can burn in a fire resulting in their value going to zero. Your bank can go bankrupt and perhaps you’ll get something eventually but your dollar denominated account could go to zero. As I keep pounding the table about, gold is always in demand. There is always someone willing to take it off your hands, either honestly or dishonestly. That has always been the case through recorded history. Why would it change now? While your gold can decrease in dollar price over time, its value remains constant. It is a lump of metal. Its value and utility do not change over time. Just like the value of water or air doesn’t change. Spanish gold coins taken from the bottom of the ocean after hundreds of years remain unchanged. They do not rust and still weight the same. If you have a house fire your gold may melt but it will weigh the same and retain its value (and dollar price). Someone will pay you just as much for that melted lump as for that shiny coin. It’s the metal that has value, not what’s stamped on it. And finally, as long as you don’t have it stored at your bank, the bank’s closure will not affect you if you hold gold. That is, if you hold it in your hands outside of the banking system.
In summation, gold is the one universal monetary means of settlement. It’s always accepted where other forms of payment are not. Got Gold?
Gold Caveats
Although I’m a complete unapologetic gold bull, one must always we cautious with one’s wealth and investments. No one can see the future or account for all potential factors that can influence one’s investments. And there’s that old saying: Don’t put all your eggs in one basket. Let’s look at some potential pitfalls and issues that warrant caution with our investment in gold.
Nobody knows the future.
Yes, I’ve been wrong in the past. Some of the best forecasters may only be right little more than 50% of the time. Having said that, I do see an almost limitless amount of anecdotal evidence and history rhyming going on today. That convinces me that gold is only going higher long term. However, anything can happen and it would be folly to place all of your investment eggs in one basket. Always consider alternative possibilities.
The return of your money versus the return on your money
At this point you should be buying precious metals to hold onto what you have in uncertain times – not necessarily to get rich. Gold is a preserver of wealth. Its value remains constant. Only its price changes. It’s the (re)discovery by the masses of gold’s true nature that makes it a bull market. Gold may only keep up with inflation from this point on or it may exceed the rate of inflation as people wake to our economic realities. There is no better protector of accumulated wealth than gold. Many of the wealthiest individuals in this world will speculate in the markets but will save in gold. You should too. Think of your precious metals as protection more than an investment.
Keep it simple
Don’t get cute with exotic investments in paper gold or leverage. You could lose it all. Think conservative with gold. You will do well holding just plain, boring, metal. You don’t need to try to beat the returns on gold or silver. They will do just fine for years to come. If you try playing the intermediate price swings you could get stopped out when the price really takes off, or worst, you could lose it all on margin calls. Then you’d miss out on the rest of this once-in-a-lifetime multi-generations bull market. That would be the worst outcome – knowing you were in the correct market, where it is going and why, buy watching from the sidelines. You’d never forgive yourself. Don’t let it happen to you.
Buy and Hold
Like any market, and perhaps more so, the gold and silver markets can be highly volatile. Especially the silver market. Markets can go counter-trend for months or even years in a primary bull or bear market. Everything you heard about equities for all those years is now true for the precious metals. These are the assets that are now buy and hold for the long haul. This is the market that you should dollar cost average into. Always think long term with precious metals. Think retirement. Think multi-generation. Buy, sell, and trade in the stock markets if you must buy preserve wealth into the future with precious metals.
Know what it is you are buying
I shouldn’t even need to write the obvious but it can be tricky. See the chapter on Gold versus Paper Gold and the section on ETFs. You’re not always buying what it is you think you’re buying. Make sure you do know. Your financial future could depend on it. A promise for future delivery of metal is a lot different than a known, assayed, quantity of metal in your hand. At some point there will be many sad individuals wishing they had purchased physical bullion instead of a promise. Don’t be misled.
Anonymity in loss or theft
Can you prove it’s yours? It’s probably easier to prove your claim on a share of stock than on a lump of metal unless your bars have serial numbers. Even then, those bars can be melted and – poof – no serial numbers. Even dollar bills have unique identifying numbers printed on them. All metal is anonymous. That’s mostly a good thing from my perspective but can be a liability when proof of ownership is required. Just something to keep in mind.
Taxes
Keep in mind that physical precious metals are treated as Collectibles for tax purposes. That means a much higher tax rate than profits on stock or mutual fund shares. See the section on taxes for further explanation.
Why Own It? The Bull Case
Own it as an inflation hedge to protect against inflation of the money supply. Gold and the dollar have historically been almost exactly negatively correlated. This means that when one goes up the other goes down and vice versa. Since about the turn of the century gold has gone up every year and the dollar is about a third off of its highs. As there are more dollars being created every day in excess of productivity or population gains, and the amount of mined gold rises much slower, the dollar price of gold must increase to find equilibrium with the supply of gold.
Own it because it is outside the banking system. There should be no third party between you and your asset. You don’t have to find an ATM to get at it. You don’t have to deal with banker’s hours to get at it. You don’t have to pay interest for someone else to store it. Your gold will never go bankrupt and shut its doors. Your gold will never make you an unsecured creditor. Your gold will not make you hire a lawyer to get at it. Fully paid for physical bullion in your sweaty little paws will be forfeited to another at great expense. Possession is nine-tenths of the law and is how the world and people operate. You can always convert it on your terms to put into the banking system. Why leave it there when there’s so much that can go wrong?
Own it because it’s highly liquid. There will always be a buyer or barterer willing to accept it. It is actually the most liquid form of money. True, you couldn’t spent it at Walmart (unless you care to spend time educating the cashier that that silver eagle is legal tender) but you can’t spend federal reserve notes outside the U.S. You have to convert to another currency. Gold is universally accepted. It is, to paraphrase Charles DeGaul, money “par excellence”. None better.
Own it because there is no third-party risk. Again, if it’s in your hands or possession, there is little risk others can abscond with it. It is easier for a thief to steal what is yours if he first has access to it than if you do. In addition to our bank example above, think about contract risk, collecting on insurance policies, your retirement account safely, and the solvency of social security. What do they all have in common you ask? Promises! They are all promises by someone else or some entity to pay you in full at some future date. Will they do so? In today’s dollars or tomorrows depreciated ones? Think of how many times others have failed to deliver in your life. Take control of your finances.
Own it now because surely there will not be any available, at any price, in a panic. People always want more of what they can’t have or what has become scarce. If everyone on the planet wanted to acquire one ounce of gold today, there would not be enough to go around. Normally when the price of something rises, demand falls. It works the opposite with precious metals. When people see the price of metals rise, they want more of them. They want o get some before the price goes even higher and perhaps, they won’t be able to get any.
Own it as catastrophe insurance. You buy home, car, and life insurance to guard against catastrophe. What happens when you can’t collect on those policies? Where do you turn then? Who insures the insurers? Is there insurance available to protect against the dollar losing its value? Yes there is. It’s called gold.
Own it to guard against dollar repudiation or loss of confidence in the economy. If no one, domestic or foreign, will accept your dollars, they will still accept your silver or gold. If the economy goes sour and the banking system seizes, you still have money to barter with for what it is you require. If unemployment reaches depression levels or worse and money again becomes scarce, you’ll still have a supply and it will likely buy you more than in good times.
Own it so that your wealth is mobile. If things get really bad, you may be able to use it to cross borders. It may become your exit visa. Gold has allowed people to cross borders in times of war when nothing else could. There are numerous accounts of people leaving Germany before and during WWII by bribing border guards. There are also numerous instances of people being able to leave former Soviet satellite states behind the Iron Curtain during the Cold War. Let’s hope it doesn’t get that bad.
What Good is It Anyhow? The Bear Case
In this chapter I’d like to address and refute some of the common arguments against gold that I often read about or hear in my classes. I love this first one.
You can’t eat it.
No kidding. How do those Federal Reserve Notes taste? Filling are they? Nourishing? I hear they have more toxic chemicals in them than cigarettes. The ink on each one contains arsenic, cadmium, mercury, thallium, and cyanide. What a dumb argument. Do you choke down your stock certificates too? Yummy. Careful, all that papers gonna make you constipated! In the world we live in we all have to convert whatever it is into dollars. My electric company will only take dollars in payment. Wal-mart doesn’t accept oil futures contracts at the checkout the last time I checked. It’s a total non-argument. If you’re of a survivalist mentality, then just store food instead.
You can’t use it at Wal-mart.
See above.
It offers no dividends/yield/returns.
Which would you rather have – a) 2% stock dividends and a sideways stock market for the last ten years or b) an average annual return of 16% on your gold for the last decade? If you said a) just give up now. I can’t help you. No one can.
What if we get another downturn in the metals like in 2008?
Gold fell less in percentage terms than did the stock markets during the financial panic, rebounded quicker, and reached new highs before the stock indexes. What more needs to be said.
It’s in a bubble.
George Soros famously called gold the ‘ultimate bubble’ in early 2010. His comment was widely reported in the mainstream media. Know what he was doing while the networks were reporting what he said? Buying Gold! I believe he almost doubled the amount of his gold holdings during the financial quarter his gold statement came out. Bubble indeed! I haven’t seen the mania. I don’t see people lined up around the block to buy gold like they were in 1979 and 1980. Tell me which gold stock has appreciated 10,000% recently. Some did better than that during the 1970s. Bubble indeed! The real bubbles are the dollar and bond markets. A 2010 study by Commodity Online of some 21,000 persons reveals that 93% were bearish on gold. 93%! When the numbers reverse and only 7% are bearish gold, that’ll be the time to sell.
It’s too ‘risky’.
The only risk I see is having none. If the dollar does collapse, you’ll be glad you had some, and if it doesn’t, we’re still in a bull market and you can exchange your metal for dollars at some point in the future. Like insurance, better to have it and not need it than the other way round.
The government will just confiscate it again.
If things get so bad that the government confiscates gold again, think of what the black market price would be. The last time they revalued the price of gold up 70% within a year of confiscating it. Most people did not turn in their gold and were allowed to keep up to 5 ounces per person. Those who turned it in got the prevailing price at the time. If you chose to turn yours in this time you would likely get the prevailing price. So you wouldn’t actually lose anything in dollar terms. Look, the government can confiscate anything at any time. Real Estate is confiscated through Eminent Domain. Think about it. No property is safe from one form of government confiscation or another. Aren’t taxes a form of confiscation of your time and labor?
What if we get deflation not inflation?
See the section on gold and deflation elsewhere in this book. That’s the beauty of gold. It will protect you equally well in times of inflation and in times of deflation.
If it gets lost or stolen, you can’t prove it’s yours.
Can you prove that the ten dollar bill lying on the ground over there is yours? How so? I say it’s mine. I’ll fight you for it. The only signature I see on it is from the U.S. Treasurer. Maybe it’s his. You say it fell out of your pocket. I say it fell out of mine. Just like you should be very careful with your paper money, you should be very careful with your gold. Don’t flaunt it or brag about it or tell others where it is or how much you have. Remember not to discuss religion, politics, or money.
Who’s going to buy it from you?
Anyone and everyone – especially when it’s not readily available. There always has been a market for gold – in good times and bad – throughout history. Why would over 5000 years of recorded history change in our time? See above about gold being real money, highly recognizable, highly liquid, desired, etc. Could you imagine someone not wanting it? Could you imagine someone walking by a gold coin on the sidewalk? I couldn’t. There will always be someone willing to take it off your hands.
What Gold Is. What Gold is Not. What Gold is Good for.
Gold is a currency. It is a store of value. That is its best and highest use. No other commodity shares this trait. Gold is the ultimate currency when all others fail. Gold is the measuring stick against which all else is valued. Gold is the currency of choice when given one. It is chosen by Central Bankers to store in their vaults. It is chosen by the wealthy to save in and store that wealth. Should you act any different?
Gold is not a commodity like oil or pork bellies. It is not consumed. It is hoarded and guarded. Gold is not to be traded easily for any other asset. It is not for trading purposes. It is not meant to turn a profit. It is not meant to provide a dividend. Its best and highest use is not for jewelry, chalices, or artwork. It is not just a lump of metal. It is not just money but the ultimate form of money.
Gold is becoming the reserve asset of choice by Central Banks once again. Ownership of gold means you are your own central bank. Holding gold means you have no counterparty risk. Gold is to be used for wealth preservation, insurance, and during catastrophe when all else fails. Gold never fails.
A Golden Timeline: The U.S. and the Gold Standard
The following is a rough outline of the role gold has played in the United States monetary system. Notice how the country has cycled from a metallic standard to a fiat system and back numerous times. This tells me we are on our way back to some form or metal backing for the dollar.
1792 – 1933 Gold backing of currency. Prices stable or falling (deflation) except in wartime.
1812 Some banks issue paper money. New England banks don’t.
1862 – 1879 First U.S. paper Greenbacks (prices rise 2x)
1873 ‘Crime of 1873’ Silver Demonetized.
1880 – 1914 Fixed Gold Standard.
1900 Gold Standard Act. ‘Pure Gold Standard’
1913 Establishment of the Federal Reserve Central Bank. Dollar loses over 95% of its original value since then.
1915 –1925 Floating Fiat Currency.
1926 - 1931 Gold Exchange Standard.
1931 – 1945 Floating Fiat Currency.
1933 Emergency Banking Bill of March 9, 1933. Roosevelt Confiscates Gold and Re-values an ounce from $20.67 to $35. Gold Reserve Act of 1934 devalues the dollar by 41% (i.e. increases gold price by 69%). Gold Certificates become Irredeemable. Gold Possession is Illegal.
1944 Bretton Woods Treaty makes the U.S. Dollar the World Reserve Currency. Other nations can redeem dollars for gold.
1945 – 1971 Gold Standard.
1960 – 1968 London Gold Pool. World Central Banks work to depress dollar price of gold.
1963 New Federal Reserve notes with no promise to pay in "lawful money" released.
1963 Executive Order 11110 signed enabling United States Notes to compete with Federal Reserve Notes. Revoked the same year.
1965 Coinage Act of 1965: Coins no longer have any silver content. (Except 40% half dollar coins until 1969).
1968 The U.S. Government no longer redeems Silver Certificate Notes for actual government Silver Bullion. 25% Gold backing removed from currency.
1969 Bank for International Settlement creates Special Drawing Right (SDR) ‘currency’.