No Love for Gold

by Frank Holmes

Gold had a bad week. Last Tuesday, the yellow metal fell more than 3% in its biggest one-day loss in three years. It broke below the $1,300 mark and touched the 200-day moving average before rising again Friday.

No Love for Gold

However, Holmes recommends a 10% weighting in gold, with 5% in bullion and coins and the other 5% in gold stocks. Investors can use this time to rebalance. When China opens for business again, expect the metal’s performance to improve.

Like gold, the British pound took a hard beating last week, plunging more than 6% in early Asian trading to a three decade low against the US dollar. The IMF warned the world that if it doesn’t deleverage—soon— there could be grave consequences.

According to data from the World Gold Council, an estimated 186,700 tonnes of gold have been mined in the history of the world. Based on today’s prices, this metal is worth $8 trillion.

Imagine we wake up tomorrow morning and learn that all debt—$152 trillion—is backed by gold. That means each ounce would suddenly be valued at roughly $23,000. With one American gold eagle, you could buy a new car and still be left with some pocket change. It’s ridiculous, but it’s part of the experiment.

There was a time when most advanced nations’ currencies were backed by physical gold. Because gold is limited, so too was public spending. In 1970, a year before President Richard Nixon closed the gold window, the US owed $370 billion. Today, it owes $19.5 trillion, or more than $163,000 per American taxpayer.

Had it stayed on a gold standard, it would have been highly unlikely, if not impossible, for its’ debts to climb so high. Central banks, meanwhile, continue to add to their gold reserves and drive demand.

Banks added 27 tonnes to their reserves in August to diversify their assets and hedge against their own policies. Russia and China were responsible for a huge percentage of the buying. In a survey of 19 central banks, the WGC found that close to 90% of them have plans either to increase their gold reserves or maintain them at current levels.

Investors might consider doing the same, for the very same reasons.


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