GOLD, SILVER, PLATINUM, PALLADIUM AND DIAMONDS

Gold is a monetary instrument. It is the only real currency. That makes it very difficult to compare gold against anything except competing currencies. A good example is the euro. All was well until gold broke above 350 euros to an ounce of gold. When that happened thinking people realized that gold was a better dollar hedge than the euro. It’s been more than 1-1/2 years since that important event and gold is still rising versus the dollar and the euro and all other currencies. In spite of what CNBC and Wall Street thinks, it is not gold that has an identity crisis, but dollar based assets and other currencies. It won’t be long before gold breaks loose of commodity prices. Then it will be again truly in a class by itself. 

            Comparing gold against oil or silver or anything else is impossible and that is why we have not given credence to such comparisons over the past 47 years. Commodities have in the past and presently offered an escape from depreciating currencies, particularly silver.

            Silver production versus consumption has fallen every year for years. Soon the silver inventory will be gone and fundamentally silver will demand higher prices.

            World gold production has fallen every year for six years and were it not for central bank inventory gold would be in silver’s shoes.  For all we know that event may be closer to realization than we think. This drop in production has occurred as gold has risen for more than 100%. It now takes 5 to 7 years to bring a new mine on stream. Gold is up 140% since 1999, but gold mining return on capital is only up 75% to 14% from 8%. Oversupply of gold at a minimum is at least seven years away and in the meantime there is a shortfall of over 150 tons every year. That inventory from central banks continues to contract and it looks like the leader of the selling pack, the US Treasury may be close to the bottom of the barrel.  As a seller of gold they have few or none good delivery bars and have to swap gold coin melt with other central banks to remain a seller. This is a good sign they are close to being out of gold. Shorts have best pay attention.

            European central banks sold 393 tons of gold last year versus a possible sale of 500 tons. That is the first shortfall since 1999. As this transpires more and more central banks talk of diversifying out of the dollar and a lower dollar means higher gold prices. Sooner or later China has to officially buy gold. What can they do with all those depreciating dollars? New on the scene is the Exchange Traded Fund, ETF. These 7 gold ETF’s worldwide are holding 500 tons of gold. There off take is 250 tons a year or 10% of world production. During the recent gold correction the ETF’s held steady and that means they are attracting long-term investment funds. The ETF is bringing capital markets, professional investors and central banks together in a way never before attempted. In time the ETF’s will be as large as the gold share sector. It draws from an entirely different sector than shares. It is being used as a long-term hedge and institutions don’t have to take delivery. It is being used as insurance. During the recent 20% decline, the ETF holdings rose some 10%. Gold is being accepted as another form of diversification. If the trend continues we could see ETF holdings dwarfing all other gold holdings and up to 25% of existing gold above ground. Gold only represents 3% of US financial assets, which means gold can double or triple without a major catastrophic event. Styles and times change and gold is about to begin to have its day in a way that will prove quite shocking to the investment world. Gold is the alternative to fiat money and once the dollar index breaks down below 80 discovery will begin. We are about to enter an age of wisdom or revolution. Either way gold will be rediscovered as the only real money.

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