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Sunday, June 21, 2020

All About Gold

Whenever economic conditions become unstable and the confidence of the general public is shaken, gold tends to re-surface as a topic of interest. As we have explained here before, gold is one market we monitor because it can provide signals as to how much confidence may be waning in the present system at any given point in time.



If you do any significant research into gold, you know that gold is a topic that for whatever reasons generates a lot of drama and passionate feelings pro and con. Here, we prefer to look at gold without the drama and examine its role over time as money, a hedge, and an insurance policy of last resort. That is what gold has been for thousands of years for billions of people. Anyone who wants to understand the kinds of economic and financial issues that shape world events must have some level of understanding of gold's economic role in both history and at the present time. 


With that in mind, we will feature the two part video documentary below as an educational opportunity for anyone interested in learning all about gold. This documentary does as good as any I have seen in providing that kind of educational opportunity.

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The Story of Man's 6,000 Year Obsession



Part I




Part II



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My added comments: While this documentary is a few years old now, the information presented is as relevant today as it was when it was released. The documentary traces the historic role of gold as money going back thousands of years, walks you through how gold is discovered, mined and refined into retail products, and attempts to peek into the future to see what role gold may play going forward either inside or outside the official monetary system. No matter how you feel about gold, you cannot watch this documentary and come away without learning anything. For that reason, we will include this article in our Marketplace of Ideas for Monetary System Reform as an educational resource on gold.

Added notes: Jim Rickards authors this recent article he titles "Why Gold?" and Jan Nieuwenhuijs authors: Why Gold and Why Now?

Alasdair Macleod, in this recent article, presents a potential worst case scenario where the US dollar collapses within the next year and only gold and silver survive the carnage. 

Former US Mint Director Edmund Moy says he keeps physical gold close at hand and views it as a hedge.


Reuters- Goldman Hikes 12 month gold price forecast to $2,000


Reuters article: World's Ultra Wealthy Go for Gold (excerpt below):

"Nine private banks spoken to by Reuters, which collectively oversee around $6 trillion in assets for the world’s ultra-rich, said they had advised clients to increase their allocation to gold. Of them, four provided forecasts and all saw prices ending the year higher than they are now."

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Additional added note: A thank you to blog reader BK who sent me the comment below by email related to the Reuters article above on wealthy clients being advised to allocate 5% to gold.

"A 5% allocation to gold is, fortunately, only $300 billion, about the market cap of Visa in the Dow.

However, a ton of gold only sells today for about $55 million, so it takes about 5400 tons, at "present prices" to achieve that allocation.

Since China and Russia produce combined about 600 tons of annual gold production, which they do not sell abroad, the total remaining production of about 2400 tons is what is available to fulfill this “new demand”.  So, if no other demand were to compete with these newcomers, it would still take 2 years and 3 months to complete this allocation from new stocks of metal.

But, how likely is it that the traditional sources of demand, augmented by more recent central bank purchases, would suddenly stop?  Will India weddings abandon gold?  World Jewelry demand? Industrial uses?

If I am correct, and the figures above have any validity, the claim that wealth advisors now recommend a 5% allocation to gold, to their super rich clients, is meaningless.  They are, as a group, already “locked out” of the physical market.  If they try to make a move, within a short period of time, they will so quickly spike the price that they will shut down the market. So, how much gold could they acquire without jolting the market?   Perhaps 4,5, maybe 600 tons per year? That might be do-able, but they would need 10 years to complete their acquisition.

One unlikely assumption in all the above is that “present prices” would prevail during this small shift in allocation to gold.  If prices increased by a factor of 10, then much less NEW gold would be needed, and indeed some significant selling from EXISTING private stocks would be expected to occur, particularly from areas ( The East ) where buyers are “price sensitive”. ( they buy when prices drop, and sell when prices have risen )   Would those “super rich” new gold buyers mind that they had to pay a huge premium to achieve their allocation?  That is hard to say.  They clearly don’t mind paying 4 or 5 times as much for a share of stock as they did 2 or 3 years ago, so perhaps they wouldn’t mind doing the same for gold.  (but for stocks, there always has to be a story.  For gold, what would the “story ”be? )

Physical gold has one huge problem for the financial industry, which takes in hundreds of billions in earnings per year in advisory, trading, and market making roles.  NO FEES.  Physical Gold sits quietly in a vault, and apart from minor storage costs, that’s it."  from reader BK



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