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THE BULL CASE FOR GOLD


Imagine you owned stock in a company in which management diluted your equity by an average of 6-8% per year.  There were no dividend payouts ever. If the company is wound up you have no claim over assets. In fact there are no assets just promises.

Substitute stock for paper money. Welcome to the world of FIAT currency.

In reality the bull case for gold is simple:  the supply of Dollars, Yen, Pounds and Yuan will grow way faster than the supply of gold.  Therefore, by extension, we could also refer to this as the bear case for FIAT currencies.  Understanding that gold does not rise in value but rather currencies fall, is akin to understanding that the Sun does not revolve around the Earth.  It changes your perspective of all things within the solar system.  So as you shift your mindset to price currencies and assets in terms of gold, you start to see the investment universe differently.

The ‘gold as money’ thesis is a powerful reason to consider investing in gold but is often crowded out by several other compelling arguments:

  1. Performance:  with average annual growth of 17% gold has dramatically outperformed stocks, bonds, real estate and cash on a 10 year basis.
  2. Fundamentals as a commodity:  increasing investment demand is outstripping mining supply with many geologists suggesting we have now reached “peak gold”.
  3. Role in an investment portfolio: gold can act as both an inflation and deflation hedge.  With a negative correlation to stocks it provides risk management and portfolio diversification benefits.  It is also the ultimate crisis hedge.

    However one statement stands above all others:

  4. Gold has been money at all times, in all circumstances, in all cultures, in all countries for over 5000 years.

This statement holds true despite the best efforts of governments and more recently central banks to discredit and demonetise the major competitor to FIAT currency monopolies.  The evolution of money from commodity money (circulated gold and silver coins) to representative money (exchangeable notes for gold and silver) and finally FIAT money (backed by nothing other than a government promise) has enabled governments to take absolute control of the money supply.

Since 1971 when the US government defaulted on its debt and President Nixon severed US dollar gold convertibility, we have embarked on a high risk global monetary experiment.   Without gold acting as a restraint, money supply could be used as a tool to smooth economic cycles, expand social programs, protect institutions and drive innovation.  The result has been unrestrained government spending, artificially low interest rates and exponential credit growth.  This may have caused a few problems recently with a banking collapse, housing bust, credit crisis, stock crash and sovereign defaults but generally the FIAT experiment has created greater prosperity for all..................or has it? (See Table 1)


Table 1:  Who is better off?


1971 Family

2011 Family

  • Dad works 36 hour blue collar job
  • Mum stays home to raise children
  • House 5 km from work place
  • Small mortgage over 10 years
  • Own car outright
  • Pay cash for annual holiday
  • Government funded education
  • Government funded healthcare
  • Government funded pension
  • Family has dinner together each night
  • Active community engagement
Life was modest but simple

 

 

  • Mum and dad are working 60 hours
  • House 1 hour from city and work
  • 2+ hours commute each day
  • 30 year mega mortgage
  • 2 cars fully financed
  • Holidays paid on credit
  • Self funded childcare and university
  • Private and/or co contribution healthcare
  • Personal super contributions for retirement
  • Family and community structure breaking down

Life is crazy.......but we have more big TV’s and iPhones

The illusion of more “stuff” distracts us from realising what is really going on.

This is the social consequence of inflation: having to go faster and faster just to stand still.


Despite the unfortunate social consequences, almost 40 years of propaganda in support of the FIAT currency system has created a generational mindset that discredits gold and misunderstands the concepts of money and inflation.  However, everyday examples, basic mathematics and historical facts expose the fallacy and fragility of the current monetary system.  The illusion of asset values in deflating FIAT currency can be clearly seen in stock prices (see Chart 1).  It is likely we will see a Dow to Gold ratio of 1 before this cycle is over.  Will that be Dow 10,000 and Gold $10,000 or Dow 2000 and Gold $2000?  Well that largely depends on money printing (Quantitative Easing) doesn’t it?


Similarly it may only take 50 oz of gold to buy the median Australian home (see Chart 2).  With gold as the constant, it is easy to see the potential for continued house price deflation.  However, the nominal price of a house may remain constant or even rise if enough FIAT money is printed.


It is time to think and act anew.  The dogmas of the quiet past are inadequate for the stormy present.  The concept of money will be redefined over the next 20 years, reconfiguring the investment landscape.  This will happen firstly, through attempts to save a dying system with exponential money printing and secondly, with the introduction of a totally new global monetary system.

Whatever the outcome, gold will continue to re-establish its 5000 year role at the centre of the monetary universe. Do you need to shift your mindset to see gold as money and the ultimate wealth protection asset?

 


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