Intelligent Investing Ideas from Forbes Investor Team
Investing |1/06/2012 @ 9:02AM |3,292 views
Bert Dohmen, Contributor
The traditional, institutional analysts will say, “I don’t understand gold. Why would anyone buy gold?” You have to understand the motivation: an investment in gold is long term. It locks up the money. The commission or management fee is much better for stocks that are traded. Many analysts have an axe to grind.
Every correction in gold is usually pronounced as the start of the “big gold bear market.” We have disagreed with that for the past 10 years. In fact, the most recent correction even turned many of the bulls bearish, while our technical indicators gave positive buy signals.
If you are skeptical about the long-term bullish case for gold, please consider this: A study by Stephen Cecchetti and his team at the Bank for International Settlements (BIS), which is often called the “Central Bank for Central Bankers,” concluded:
“The debt problems facing advanced economies are even worse than we thought.
“The basic facts are that combined debt in the rich club has risen from 165pc of GDP thirty years ago to 310pc today, led by Japan at 456pc and Portugal at 363pc.
“Debt is rising to points that are above anything we have seen, except during major wars. Public debt ratios are currently on an explosive path in a number of countries. These countries will need to implement drastic policy changes. Stabilization might not be enough.”
In my opinion, the compounding interest on this debt is even more ominous than the actual level. There is no way that this debt will ever be reduced. Remember, much of this debt was accumulated during the boom years when tax receipts were very high. Now we will be in long period of stagnation or worse, possibly lasting 10-15 years or until the next big war. That means tax revenues will be on a long-term decline even as tax rates rise. The debt levels will grow exponentially.
Trillions of sovereign debt, private debt, and bank debt have to be refinanced. Where will that money come from? The printing press, or with today’s technology, “cyber-money.” There is no other way out. And that will make gold the only true money that will hold its value.
Sometime in the future, there could actually be a gold shortage. This is not unrealistic. All the major mining companies say that it is becoming very difficult to find new deposits. CNBC had a great report on the South African mines. They sent one of their top people, Bob Pisani, to do a report. He went 2 km down into a mine where the air-conditioned temperature is 100° F. Without air conditioning, it would be 130°. It was a fascinating report about the mining, refining, and then the ETFs.
Some of the South African mines are as deep as 4 km. Gold mines in other parts of the world, like Latin America, are facing dangers of being expropriated by their local governments. That dampens the enthusiasm of foreign mining firms to invest huge sums in new mines. It takes up to 10 years to get a new mine into production. If you are ever tempted to go into one of the penny stock gold exploration firms, just ask them, where will they get the tens of millions of dollars required to go into production?
In the meantime, the gold purchases by people in India and China are soaring. These two countries are 52% of all gold demand right now, vs. just 25% a few years ago.
And in the western world, the gold-holdings of the ETFs are locking up gold supplies. For example, the SPDR Gold Shares (GLD) now holds 1,200 tons of gold, stored in England. The more the buying of GLD and other ETFs increases, the more gold will be taken off of the market, i.e., the shortages increase. Secured storage facilities are running out of space. New facilities are hurriedly being built.
We are now at the point in the long term cycle where institutions are just starting to consider gold an “investable” asset worthy of their portfolios. All the other areas of the stock markets are no so closely correlated that it doesn’t matter which sector you hold.
We are still in the earlier phases of the gold bull market. In 1981, my firm predicted a 20-year bear market in gold (bottom in 2001) and then said that this would be followed by a 30-year bull market according to our cycle studies. The start of the current gold bull market was in 2001, exactly 20 years later. If my 30-year bull market cycle comes true, then there is quite a bit of excitement still ahead.
What could possibly cause that? In 1981 when we made the 30 year bull market forecast, we said we didn’t know what would cause it. Now we know: unprecedented and unsustainable debt levels of governments around the globe and a threatened implosion of the debt pyramids. The power of compounding of governmental debt alone will continue to increase that debt. It will require ever more money-creation just to service the debt. Taxes alone cannot do it. Big tax hikes will only worsen the debt problem. Compounding at any rate, even at 1%, is unsustainable over time. Just try it on your HP calculator.