On Wednesday I presented to a large group of financial planners at the Van Eyk annual conference in Sydney. Full credit must go to Mark Thomas and his team at Van Eyk for allowing gold to headline alongside the chief economist from Goldman Sachs. It may have taken 10 years of 17% compounding growth and out performance of every other asset class on the planet but maybe gold is finally getting the mainstream recognition it deserves.

Rather than focus on the numbers my presentation was more educational in nature. Financial planners really need to understand that the next 20 year investment landscape will be totally different to the last 20 years. Most importantly they need to understand the basic concepts of money as currency volatility and risk will be the single biggest determinant of investment returns going forward. The basic concepts of money, inflation and real vs nominal returns are poorly understood by the financial planning community. Our assertion is that in an environment of high sovereign risk, and therefore currency instability,  purchasing power will continue to be eroded. Therefore we encourage planners to consider gold as a 10-30% weighting in investment portfolios.

Some key points from the presentation:

Why should you consider gold?

Performance

• 17% annual growth since 2001
• 10 consecutive years of price appreciation
• Dramatic 10 year outperformance of equities, bonds, real estate & cash

Role in an asset portfolio

• Strategic asset allocation
• Hedging
• Tactical asset allocation

Fundamentals as a commodity

• Increasing investment demand
• Industrial usage
• Declining mining supply (peak gold)

Emergency Money

All US fighter pilots carry an emergency kit in case they are shot down.
The kit includes survival gear and some money:

Which currency do US fighter pilots carry in their survival kits?

a) US Dollars

b) Euros

c) Local currency (eg Iraqi dinars)

d) Gold coins

Answer: d) Gold coins

At all times

In all circumstances

In all cultures

In all countries

For 5000 years

The evolution of money

• Commodity money effectively ended when the US government defaulted on its obligations in 1932.

• Representative money ended on August 15th 1971, when the US again defaulted on its obligations.

• Today’s massive debt problems are a direct result of unrestrained spending enabled by FIAT money.

The functions of money

By definition money must perform 3 critical functions:

Due to its inability to act as a store of value over time, it is inaccurate to classify FIAT paper as money, it is currency.

Store of value

If you buried US $100 in 1775 and dug it up 100 years later you would have exactly the same purchasing power

However if you buried US $100 in 1913 and dug it up today you would have less than $4 purchasing power

The critical difference is the spending restraint on government under a gold standard.

Gold has preserved purchasing power for thousands of years.

How is money created?

The loss of purchasing power is better understood when you know how money is created:

All money is loaned (borrowed) into existence

Therefore it is a fact that all money is debt and our system requires perpetual growth just to survive

By design the survival of the modern monetary system is reliant on perpetual growth

Inflation or loss of purchasing power is baked into the system

This is Keynesian economics. Spend (borrow) your way to prosperity.

Anyone who understands basic maths and the exponential function knows that in a world of finite resources this is a big problem at some point. 

Then growth does not equal prosperity.

Inflation = system survival


Inflation has and always be a monetary event, price changes of goods and services  are consequential  (too many dollars chasing too few goods)

Governments and central banks have already shown that the system will be saved at all cost.

Understand basic maths of exponential growth and overlay human psychology and....

Inflation will be created at all cost to stimulate the growth that the monetary system requires for survival

In Ben Bernanke’s own words.....

”The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost”

From the Dr. G. Gono, chairman of the Reserve Bank of Zimbabwe....

‘As Monetary Authorities, we have been humbled and have taken heart in the realization that some leading Central Banks, including those in the USA and the UK who have now seen the light on flexible and pragmatic central bank support’.

In Marc Faber’s own words.....

“We have the Austrian school and the Keynes school. Now in the US, we have a totally new school, and it’s called the Zimbabwe school and it’s founded by one of the great leaders of this world, Mr Robert Mugabe, that has managed to totally impoverish his own country. And that is the monetary policy the US is pursuing."

Due to irresponsible central bank policies the smart money is mobilising into gold

China has doubled gold reserves in last 5 years

China runs TV ads to encourage its citizens to buy gold and silver

India purchased 200MT of IMF’s gold

Central banks have moved from net sellers to net buyers

Big fund money has arrived John Paulsen, Greenlight Capital, Paul Tudor Jones, George Soros

It is all about physical, not paper promises

China is establishing Hong Kong as the new Asian hub for physical gold

Germany and other countries are repatriating physical gold from US and UK

Gold now operates on a fractional reserve basis

At some point we will see a price divergence between physical gold and paper promised gold

8 Golden rules

1.       Become your own Central Bank

Throughout history gold has been the bedrock asset of governments and central banks. The Chinese government has doubled its gold reserves in the last 5 years. The US government holds 75% of its reserves in gold.

2.       Get physical

In physical form, in your possession, gold and silver are no one else’s liability.

3.       Accumulate

Regular accumulation, or dollar cost averaging, is an effective strategy in volatile markets.

4.       Buy and hold

Gold and silver are long term bedrock assets.

5.       Never go all in

Top investment advisors recommend between 10 – 30% of net wealth in precious metals.

6.       No leverage, ever!

Futures and other highly leveraged instruments are for the professionals only. It’s like a rigged casino. It is statistically proven you will not win.

7.       Don’t forget silver

Many fundamentals for silver are even better than gold. Silver has a dual benefit as an industrial and monetary metal.

8.       A quiet investment

Gold and silver in your own possession sit outside the financial system. They have protected the wealth of families from economic, social and political disruption for over 5000 years.

The bull case for gold is simple.....

The supply of dollars will grow way faster than the supply of gold.