Why Gold is a Buy Right Now

Eric Roseman (May 26, 2010)

And Why the Great Euro Bailout Means You Should Stock Up

At the rand refinery in South Africa, the phone was ringing off the hook earlier this month.

The refinery, which sells the mighty fine South African kruggerand gold coin, usually gets orders for about 2,000 coins at a time from their European clients.

But last week, a German bank ordered 30,000 coins in one shot … followed by another 15,000 coins from another bank.

It’s no wonder, as Germany agreed to contribute to the International Monetary Fund’s and the European Union’s 750-billion-euro bailout plan.

Sure, you could play the euro here … or maybe even the rand … but take a close look at what type of coin the rand is.

And there, friends, is your “golden” opportunity! Here’s why…

The Impact of the Great Euro Bailout

Individuals in Europe are growing alarmed that the European Central Bank (ECB) has deviated from the anti-inflation mantra set forth by the legendary German Bundesbank and, instead, will begin monetizing debt or creating paper money to bail out weaker Eurozone countries.

The ECB’s credibility is now in the toilet along with the Fed’s – two of the world’s largest reserve or quasi-reserve currencies.

In the end, I think the ECB, IMF and the Germans will stabilize the Eurozone capital markets. And what we’re witnessing right before our very eyes is the beginning of the end of the post-World War II global exchange-rate system.

The exchange-rate mechanism, dominated by free-floating currencies since 1971, is out-of-control, destructive and causing all sorts of chaos for governments, investors and businesses alike.

In 2010, gold prices have gained 13% in dollar terms, 28% in euros and 13% in yen. The chart below has gone parabolic, showing gold in euro terms.

The endgame will be a formidable crash, probably a dollar crash.

And as my friend Frank Trotter over at EverBank shared with Total Wealth Symposium guests last week at our breakfast panel on gold and currencies, he sees a continued dip in the euro before it moves higher.

You Know You Should Own Gold. Here’s Why

Everyone has probably told you to buy gold. (If they haven’t, you might not be talking to the right people!)

But when it boils right down to it — as our friend Rich Checkan, of Asset Strategies International, told Symposium guests — gold is up against all currencies, as almost all are struggling.

As Rich elaborated, “We’re printing a lot of money, and struggling with a lot of domestic issues. With the floor for gold at about 1,050, the world has sent a signal that it’s OK with four-digit gold.”

Over the coming 12 to 16 months, we may see the greatest market ever for gold.

One reason is that the International Monetary Fund is holding 190 tons of gold that it has to unload. North of $1,250 per troy ounce, the IMF could start unloading it to get cash for the bailouts in Europe.

What will that mean for prices? In the absence of aggressive interest-rate hikes in the world, investors should use the upcoming correction – which should be quite sharp but short-lived – as another opportunity to accumulate gold.

What’s the Best Way to Buy Gold?

Like Frank says, nothing beats holding gold in whatever you call your backyard.

If you’re interested in owning physical gold, there’s no time like the present to think about where you’re going to store it.

Gold and silver, and particularly gold, should be held in a diversified way. You can hold it in your home domicile (coins in a safe), with a family member you trust, in a bank at a safety deposit box, and you could have some physical gold overseas — not just for tax reasons, but for insurance.

Most people go to gold because they’re concerned about their wealth. And they will for the foreseeable future.

But Rich notes that right now, “People are buying for need, and not greed.

“No matter how high gas goes, you need to fill your tank,” he said, noting that many people are buying gold because they’ve temporarily lost faith in currencies.

Another Way to Own Gold

If you’re looking or another way to diversify your gold holdings, there are plenty of gold-mining stocks out there that are there for the taking.

Our friend, and coin legend, Van Simmons tells us that he trades mining stocks every day — and that they often trail the price of gold. “Gold has been in such a strong bull market that, if it pulls back 50 bucks, people think the bull market is over.”

Van notes, however, that we haven’t seen the blowup or the pullback in gold-mining stocks. “I think gold-mining shares will have their day.”

Why I Own Gold … and Will, for the Considerable Future

I don’t own gold because I’m necessarily worried about inflation or deflation.

I don’t own it because I’m a “gold-bug.”

And I don’t own it because I think we’re approaching the end of world as we know it.

I own gold (and some silver) mainly because the global exchange-rate system is not functioning properly, and the balance of power that has shifted from West to East (accelerated since the 2008 crisis) will increasingly demand a replacement for fiat dollars or fiat euro.

That transition will be violent.

That’s why I own gold.

Never in the history of the world has economic power shifted peacefully from one dominant nation to another without some sort of conflict or crisis. This time will be no different.

Also, I do think the consequences of all this printing will result in enormous inflation down the road – staggering inflation.

The Hottest of the ‘Hot Commodities’

Gold is hot … maybe too hot right now. And just like any “hot commodity,” it’s subject to a cooling-off period.

As our friend Thomas Fischer, of Jyske Global Asset Management, warned, “Gold is a great store of wealth, but everyone’s on the same side of the trade right now.”

It’s easy to see why.

Gold is in a secular long-term bull market. Those investors who fail to recognize or appreciate the primary trend also fail to understand gold’s role in a post-credit crisis environment of escalating government deficits, central bank debt monetization and the adverse long-term implications of these policies on paper money’s purchasing power.

The IMF has about 200 tons of gold that it wants to sell, but it isn’t finding any buyers.

So although this suggests that central banks aren’t looking to build gold reserves at $1,230 an ounce for now, I think that will change ahead of the next currency crisis – probably in the United States.

The World Gold Council recently reported that net gold sales by central banks are now at their lowest levels in 20 years. Selling by European central banks slowed to a crawl following the renewal last September of the Central Bank Gold Agreement, which regulates the sales.

Only 2 tons have been sold since September 2009.

Whereas central banks dumped bullion en masse in the 1990s, many are now either holding on to their bullion stash or in many cases, as it pertains to the emerging markets, accumulating gold.

No Reason to Sell

The IMF doesn’t have to sell gold. The United States is its largest shareholder and can simply transfer the money it needs for bail-outs electronically.

But it would seem like an opportune moment for the IMF to sell gold now in order to depress this rally, which compromises paper money and its legitimacy.

At some point later this year or in early 2011, I think the U.S. economy will double-dip or sputter back into a recession. That’s when we’ll see gold surge to $2,000 an ounce or higher — and very quickly.

This will probably mark the last time investors will get a chance to buy bullion before the final phase of this bull market takes prices to at least the 1980 inflation-adjusted high of $2,309 an ounce. So, use any short-term pullback as another opportunity to buy gold.

Eric Roseman

Editor, Commodity Trend Alert

P.S. The supply/demand curve currently favors precious metals. And the gold story is going to shine for a long time to come. And it’s not the only one!

In fact, many commodities — and commodity-based stocks — are trading at 40%, 50% … even 60% off their highs.

With demand growing and supplies shrinking every year for precious metals, natural resources and — believe it or not — food, you might be tempted to run out and buy, buy, buy.

But the steeper the discount where you enter a position, the bigger potential upside you can enjoy when it explodes back to its former highs … and beyond!

With commodities taking a bit of a breather before their next run higher, there’s no better time than right now to jump in on my Commodity Trend Alert service.

I’m excited about a couple of new developing themes, and I can’t wait to tell my subscribers what to pull the trigger on … and when. Take the service for a risk-free trial today — click here to find out how…

Tags: globalinvesting