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Why Gold Is Still a Good Long-Term Investment

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Washington’s Blog
Wednesday, June 1, 2011

Utah has declared gold and silver to be legal tender – with the value of the coin determined by the weight of precious metal it contains

As the New York Times notes:

The law is the first of its kind in the United States. Several other states, including Minnesota, Idaho and Georgia, have considered similar laws.

World Bank president Robert Zoellick noted last year:

Although textbooks may view gold as the old money, markets are using gold as an alternative monetary asset today.

Alan Greenspan told the Council on Foreign Relations:

Fiat money has no place to go but gold.

***

If all currencies are moving up or down together, the question is: relative to what? Gold is the canary in the coal mine. It signals problems with respect to currency markets. Central banks should pay attention to it.

China is buying a lot of gold. As CNN Money reported on May 20th:

China edged out India to become the world’s largest buyer of investment-grade gold products, according to a World Gold Council report.

In the first quarter, Chinese consumers purchased 90.9 metric tonnes in gold bars and coins, valued at $4.1 billion.

That’s more than double the amount Chinese consumers were buying a year ago.

***

“You have a growing middle class that has increasing disposable income that is also concerned about upward inflation pressures,” said Carlos Sanchez, a precious metals analyst with independent metals research firm CPM Group.

Indeed, commentators such as Ambrose Evans-Pritchard and Byron King have argued that China’s hunger for gold will put a floor on gold prices. Specifically, they argue that China will “buy the dips” in gold prices, effectively putting a minimum on how low gold prices can go.

Moreover, with virtually all of the world’s countries printing money like mad, it is not gold – but rather fiat currencies themselves – which are in a bubble. In that light, gold is not overpriced.

And as I noted last year in an exhaustive roundup, there are many other reasons that physical gold could be a good long-term investment (even if there are sharp corrections in the short-run) including:

1) sovereign defaults; 2) shortages of physical deposits; 3) the dollar; 4) central banks; 5) declining production; 6) inflation; 7) deflation; 8) uncertainty and distrust in government; and 9) flight to safety.

Notes: Timing is, of course, everything. Buy during a dip.

If governments start raising interest rates world-wide, it might be time to sell gold. But there doesn’t seem to be any risk of that in the near future, as virtually every government which has the ability to do so is still printing money like a drunken sailor. Virtually no country has the political discipline to raise rates.

If you are skeptical of gold because it is not very portable in the event of a major disruption, you might consider buying precious stones, which are easy to transport.

I am not an investment adviser and this should not be taken as investment advice.

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This article was posted: Wednesday, June 1, 2011 at 2:24 pm





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