Gold has proven its unquestionable worth, countless times over, as protection against destruction of value. Gold is the only form of money that has survived for over 5,000 years. Gold is also a great way to diversify a portfolio because it is not positively correlated with other assets.
Gold is regaining its historical money status: For 2,000 years, money was made of gold and silver. Since 1971 and the end of the gold standard, we are living in a monetary “experiment” that has failed, as all other money experiments with currencies non-convertible into tangible assets have failed. Historically, these experiments with non-convertible paper currencies last for an average of 27 years. The dollar experiment is already 50 years old... it is coming to an end.
Physical gold cannot go bankrupt and default on promises or obligations.
Gold miners cannot increase their gold production. Demand is stronger than supply and the 2008 “credit crunch” has put a dent in gold producers’ capacity to secure financing for new projects that could increase gold production.
The inability of governments to balance budgets and the implementation of low interest rates are quite likely to bring about a destructive bout of hyperinflation. By printing billions of new dollars and euros, governments devalue their currencies, generating inflation and the risk of hyperinflation. When a larger amount of money is spread on a finite amount of goods, all prices increase nominally, generating inflation.
Derivatives (“financial weapons of mass destruction”, as Warren Buffett calls them) are destabilizing the banks’ financial health. They represent one quadrillion dollars, or 16 times the world’s GDP. The explosion of this time bomb could bring about the bankruptcy of the whole financial system.
Gold is still extremely under-valued, in relation to the colossal amount of printed paper money. If, as certain analysts are anticipating, we are on the road to a hyperinflationary period, money will be destroyed along with its purchasing power. Those holding dollars or any other form of paper currency will lose a significant part of their purchasing power. In tracking money supply, gold can help investors protect against potentially excessive asset price inflation and currency debasement. The “Gold/Dow Jones ” ratio allows us to see the level of gold valuation for the long term. Historically, gold is properly valued when the Gold/Dow Jones ratio is between 1 and 2. As of september 2022, that ratio stands at 18. This clearly shows that gold is undervalued in comparison with stocks. We could add to that the stock markets plunging all around the world and the freefall of real estate in some countries (or its over-valuation in France, for instance), not to mention the risks with sovereign bonds. Demand for gold as an investment is accelerating but we are still at the beginning of this phenomenon. Very few people own gold or silver in their investment portfolios. It is impossible to call gold in a bubble when a mere 1% of world savings is presently invested in it. Historically, the average investment in physical gold has always been around 15%. Taking inflation into account to reach its historic peak of $850 in 1980, the price of gold should be much higher, even as high as $7,500 an ounce, according to some experts.
There is a growing awareness of the fact that several issuers of financial products to invest in gold (ETFs, gold certificates) do not have the amount of gold they claim to own: There is 100 times more paper gold sold via certificates than there is actual physical gold sitting in the vaults of these certificate-issuers. Consult Dan Popescu’s analysis: "How Much Gold has been Leased Throughout the World". Only invest in PHYSICAL gold that you own in your name. Do not expose yourself to any risk of counterparty default.
The demise of the dollar as the international reserve currency is unavoidable: Faced with the accelerating devaluation of the dollar, made possible by “quantitative easing” policies (or out-of-control money printing), all countries with excessive monetary reserves (generally denominated in dollars) are trying to convert their dollars into tangible assets. A number of central banks in countries such as Russia, China and Brazil are converting their dollars into gold in order to preserve the purchasing power of their reserves. This run from the dollar toward real assets (gold, silver, farmland) is irreversible and helps speed up the dollar’s devaluation. The other international currencies do not constitute an alternative, because they are all based on unconvertible paper. Most countries hold much of their reserves in dollars, since it is the international currency reserve. But the dollar is not playing its role of “reserve” of value anymore. The acceleration of de-dollarization will therefore inevitably lead to an increase in the demand for gold.
Central banks are net buyers of gold. Central banks are no longer selling gold on the markets. They are reducing the supply and are now buying gold in order to limit their exposure to the loss of purchasing power of their reserve currencies, consisting mainly of dollars. Central banks in Asia, the Middle East and Russia are seeing their dollar reserves lose purchasing power as billions of new dollars are issued by the Federal Reserve. India, la Russia et la China are accumulating large quantities of gold very rapidly, to the detriment of Western powers.
