John Mauldin on Gold

John Mauldin, author and financial advisor, has some interesting thoughts on gold.

The question I am asked the most is some variant on “What do you think about gold?” So, let me deal with that question here, as it has been a while.



First, I do not think of gold as an investment. It is insurance for me. I buy a rather fixed amount of gold nearly every month, no matter the price. I hope the price of gold goes down, because that means I get more coins in the mail to go into the vault. Yes, I take delivery of my gold, and it is near me if I need it.



My fondest dream is that I will give my gold coins to my great-great grandkids some 70-80 years from now, and they will be rather embarrassed that their “Papa John” bought all that much of that barbarous yellow metal instead of more biotech stocks. But as I live in the real world, I buy gold, even though I am optimistic we’ll get through this rough patch; because I simply don’t trust the bas*%*ds who are driving this ship with 100% of my money in dollars, or any fiat currency, for that matter.



Gold to me is a neutral currency. While the metal looks good over the last ten years (and I became bullish on it in 2002 in this letter), over the last 32 years it has not had all that much luster. Bonds have been much better as an investment. It is all about timing.



If I wanted to buy gold for investment or trading, I would simply buy GLD. (It is an excellent vehicle for traders; however, GLD is not what I think of as insurance.) And if I were buying gold as a trade, I would buy it in terms of the euro or yen, which I think are both going down against the US dollar.



For those who want to buy larger sums of gold, there is a program that I like backed/sponsored by the state government of Western Australia, called the Perth Mint. You can buy gold certificates that represent actual bullion in vaults in Perth at reasonable prices. While your gold is stored in Perth, you can take delivery if you want and leave the country with no taxes owed. Or you can sell the gold and get cash. You diversify your country risk, have excellent and safe storage facilities, diversify your currency risk (if, like me, you think of gold as a currency), and have a different asset class than traditional portfolios.



...Where to buy actual bullion? Gold coins are gold coins. ASI is a good choice, but I would shop around. Depending on the amount you are buying, mark-ups can be significant, and there are differences in service and responsiveness. Delivery can be an issue, although I get mine in the mail with insured mail (although we do have to pick it up!).



Do I think gold is at a high? While I hope so, I truly do, I rather think that gold still has some upside because of government policies. When the deficit gets under control and we are on the road to real recovery, I rather think that gold will come back down from whatever highs it makes. I remember in 1980 there were True Believers who thought gold could only go one way.



For the record, I think you should own about 5% of your net worth in gold, as insurance, not as an investment. The “goal” and your hope should be to never have a reason to sell your gold. I trust that tells you where I stand.

Given the ongoing meltdown in Europe -- with a liquidity crunch unfolding at this very moment -- words of caution are warranted.

Banks are seeking to retain their liquidity, making interbank lending more difficult, as funding from money and capital markets becomes harder to obtain, ABN Amro Group NV Chief Executive Officer Gerrit Zalm said.



Interbank borrowing for more than six months is also becoming problematic because banks are reluctant to lend to competitors with “big positions in weaker countries’ debt, for instance,” he said today on Dutch television...



A demise of the euro would have “catastrophic” consequences for the Dutch economy, which sends about three- fourths of its exports to other euro-zone states, and “would cause a recession that would make the 1930s a trifle by comparison,” Zalm said.

No one can say where the price of gold is headed. But the reckless debts run up by big government Marxists and progressives around the world do nothing but demoralize investors in fiat currencies.

Is a Run on Physical Gold Beginning? Hugo Chavez Launches 'The Largest Physical Move of Gold In Recent History'

Adding to the month's economic turbulence comes this announcement by Venezuela's dictator:

The largest physical movement of gold in recent history is under way... Hugo Chavez... wants to move his country’s 211 tonnes of gold (over $12B at Friday’s close) currently stored in American & European banks back to Caracas.



...this recent move by Venezuela is rather unique. Instead than buying more gold, Venezuala merely wants to repatriate what is already hers. Unlike central bank purchases, which could involve just a ledger entry, this is the real thing. Physical gold is being moved around. What’s more significant is the discovery that after accounting for the 99 tonnes and 11.2 tonnes being held at the Bank of England (BoE) and Bank of International Settlements (BIS) respectively, about half of this huge stash are held in bullion banks like JP Morgan Chase et al – all major gold shorts. The move has left them scrambling for the real stuff.



This has led many to believe that the “Golden Retrieval” may have been a contributing factor to the most recent spike in gold price. It hits at the core of what GATA has been highlighting for over a decade – that bullion banks have been working hand in glove with central banks to suppress the price of gold, and that much of the physical gold at bullion banks and central banks are encumbered, leased or sold many times over, resulting in multiple claims for each bar of physical gold.

Grant Williams offers a well-informed take on why this step is so important:

To sum up:



• It is common practice for most Central Banks to hold part of their gold reserves overseas in ‘gold trading centres’ (read London and New York)

• One of those Central Banks - that of Venezuela - wants its gold back

• That means that a group of banks (mainly in the UK and the USA) who are supposed to have that gold in their vaults need to GIVE it back...

• ...which in turn could potentially trigger a race to repatriate national gold holdings

• Neither Fort Knox nor the Federal Reserve (the world’s two biggest gold depositories) have been independently audited in recent times

• The status of the gold held in the Bundesbank (home to the world’s third-largest hoard) is somewhat unclear

• The practice of leasing gold by Central Banks has been going on so long that it even predates the time when Alan Greenspan advocated sound money

• The gold ‘physical market’ is approximately 100 times the size of the amount of actual underlying metal by which it is purportedly backed

• The top four bullion banks, or ‘commercials’ on the COMEX continue to run what we shall politely call ‘significant’ short positions...



In the three trading sessions since Chavez made his announcement on August 17th, gold has added almost $100, coming within a whisker of $1,900 before settling back at another record weekly close.

Last year, a board member of GATA ("The Gold Antitrust Action Committee"), predicted this "run on physical gold":

• the gold price is suppressed through fractional reserve bullion banking

• the gold market is selling on average 45 ounces of gold for every one ounce of real physical gold via “unallocated gold” (fractional reserve bullion banking). In other words the gold market is backed by only 2.3% gold

• The true price of physical gold is currently around $54,000/oz if fractional reserve bullion banking did not exist. In the presence of fractional reserve banking with 2.3% gold backing the market price of “gold” is reduced to $1200/oz

• The US dollar has a purchasing power that is 45 times over valued

• The way to end gold price suppression is for investors to ensure they have allocated physical bullion preferably held outside of the bullion banking system

Chavez' call to repatriate his country's gold could therefore be the start of a true "run on the bullion banks".

When a major “client” like Venezuala suddenly decides to have take physical possession of her gold, it may cause a run on the bullion banks, not unlike the much feared bank run for cash. Bank runs start when depositors begin to lose confidence in the banks holding their cash. All it takes is a a few large depositors withdrawing at the same time, thereby creating the initial stress in the fractional reserve banking system. Soon, the panic hits the masses and long lines form outside the banks.

The next few weeks of market action should be, er, exciting.