Updated on 02/07/17
Is gold a good long-term investment?
Some media commentators might say no. They point out that gold has been in a bear market since 2011. Or claim that stocks are a better investment. Or remind us that gold doesn’t pay dividends.
But the facts about gold show that these arguments are either wrong or short-sighted. The reasons to buy gold bullion now are strong and escape the notice of most gold critics.
Here are nine facts about gold that show why it’s an unbeatable long-term store of value and why buying now could be an exceptional long-term investment…
Gold Fact #1: Gold Is Not a Commodity
Most non-metals analysts lump gold in with all other commodities. But that’s misleading, and here’s why: gold isn’t “consumed” like all other commodities. It isn’t eaten like corn or cattle. It isn’t discarded after use like cotton or paper. And it isn’t burned up like oil or gas or coal. Most of the gold ever mined still exists today.
Only about 12% of gold’s total annual supply is consumed by industry. It’s used in dentistry, the medical field, aerospace, computers, and other electronics.
The other 88% of supply is used for investment and jewelry fabrication. And a large share of jewelry use is actually a form of money. Many eastern cultures buy gold jewelry as a store of value instead of coins and bars. That explains why “jewelry” demand is much greater across Asia than in the West.
Here’s a comparison of gold’s industrial use to that of other metals:
The fact is that nearly all commodities are consumed—and most gold is not. That’s why bullion should be viewed as a different investment.
Investor Key: Gold is not a commodity. Viewing it as such will lead to poor investment decisions. Exclude gold when you hear about the “commodity complex.”
Gold Fact #2: Gold Is Money Itself!
Gold is valuable because it’s a proven long-term store of value. Throughout history, it’s the only metal whose predominant use is as money.
Here’s why gold as money is important:
➢ Gold is the world's only universally accepted form of final settlement.
Stocks and bonds, on the other hand, represent claims on assets. Their value rests on the issuer’s ability to fulfill their promise. As such, all stocks, bonds, currencies, and financial assets carry the risk of default.
This is one of the primary advantages of holding gold bullion.
Investor Key: Gold is the only financial asset that requires no other obligation to be made good. If you hold physical gold, you have zero default risk.
Gold Fact #3: Gold Is the Oldest Financial Asset
Gold has also lasted for millennia. No stock, bond, or currency can make that claim.
The oldest publicly traded US stock is the Bank of New York, which was established in 1784 by Alexander Hamilton. Today it's The Bank of New York Mellon (BK). Most all other stocks have been trading for less than 50 years.
That’s not to say they’re bad investments. But if you’re looking for an asset to tuck away for the rest of your life (or your kids’ and grandkids’ lives) and an investment that can weather virtually any crisis, gold is the only asset that meets that criteria.
The same survival issue is true with paper currencies. They don’t last forever—not a single one has. Consider that almost half of the world's currencies went to zero during or immediately after World War II.
Look at the longevity of the world’s major currencies against gold:
Despite the ups and downs in its price, gold has proven it will survive anything the world throws at it.
Further, none of these currencies are healthy…
Seven years after the financial crisis and the issuing governments of these currencies are still running big fiscal deficits!
This forces central banks and politicians to devalue their currencies. Gold is one of the few assets that can protect us against this reckless behavior.
Another reason gold is money is that it’s lasted for millennia. It will continue to do so, giving us a measure of safety no other asset can.
All major currencies in use today have unhealthy balance sheets. Gold will protect your portfolio from the fallout from this and other monetary issues. It gives you ultimate control of your wealth.
Gold Fact #4: The Gold Market Is Smaller than Walmart
The gold market is tiny. Compare the value of the annual gold supply to some commonly held stocks.
The value of an entire year of new gold supply is less than the valuation of many US companies!
Here’s another way to look at it…
|Total Gold Supply||$6 Trillion|
|Total Global GDP||$50 Trillion|
|Total Global Debt||$200 Trillion|
The total stock of above-ground gold in existence is currently worth about $6 trillion. That is roughly just 3% of current worldwide debt!
Investor Key: The gold market is tiny compared to the stock and bond markets. The price will be driven higher when the next crisis hits and investors around the world pour into this small market.
Gold Fact #5: Gold is Near a Cyclical Bottom
The gold price moves in cycles, like all other assets. Boom, bust, repeat.
Based on historical patterns, gold is near a cycle low. The recent decline in price is similar to those seen in the past.
More important are the big upcycles that follow. The percentage gains were all double digits, with several triple digit bonanzas.
Investor Key: Historical patterns show that buying gold now is a low risk proposition. The next major move in the gold price is UP.
Gold Fact #6: Gold is Near an All-Time Low
There isn’t a sure-fire way to value gold. It doesn’t produce earnings that can be analyzed, for example.
One straightforward method, however, is to adjust the price for inflation. We could use the government’s Consumer Price Index (CPI)—but the formula has changed at least 13 times since 1980. Each adjustment reduced or eliminated the impact of higher prices of things we all use, like food, health care, rent, and tuition. As a result, many protest that the CPI doesn’t reflect true inflation as felt by the typical consumer.
So I asked John Williams of ShadowStats to calculate the gold price using the 1980 formula. Check out the gold price using a far more accurate measure of inflation.
The price is nearly as low as it was in 1970! This clearly shows the upside potential in gold.
Investor Key: Using a “real world” calculation of inflation shows gold is near an all-time low. The potential gains ahead could be spectacular.
Gold Fact #7: Investment Demand Is Relentless
Whenever the gold price falls, demand for physical bullion surges. It’s happened every year since the 2008 financial crisis.
Unable to meet this demand, government mints had to suspend sales three times since 2013. It’s clear many investors think they need to own gold right now.
The demand for physical gold is nowhere more evident than in China. The Shanghai Gold Exchange trades mostly in physical metal, not in futures contracts (paper gold) like is done on US exchanges. The next chart shows the dramatic rise in gold leaving the exchange.
By the end of September 2015, more physical gold had been withdrawn from the exchange than in any year… ever. There is no doubt that Chinese investors see a need to hold physical gold right now.
Investor Key: The demand for physical gold shows no sign of letting up, despite the low price. Obviously many investors view gold ownership as vital at this time.
Gold Fact #8: Gold Production Is Peaking
Due to gold’s low price, producers have been forced to cut back on exploration and development. Reserves—the amount of gold in the ground that can be economically mined—have fallen dramatically. And companies are mining the higher grade portions of their mines to remain profitable, leaving behind only low grade ore.
This paints an ominous picture for future supply. Here’s the breakdown…
- Major gold producers have cut exploration budgets by 36.5%. They’ll spend $622.7 million less in 2015 looking for gold than in 2011.
- Canadian junior exploration companies have over $5 billion in “questionable” assets on the books. Many of these projects will never be developed.
- Among 250 Western Australian mining companies, exploration budgets have fallen from over $1 billion in 2013 to about $630 million in 2014, a 40% decline.
Obviously, if the industry spends less money looking for gold, they’ll find less gold.
- Of the world’s ten largest gold producers, only two expect their minimum level of output to materially rise this year.
- Respected industry consultancy CPM Group projects that after peaking in 2017, mine production will decline for at least six years.
- Seven of the world’s largest gold producers reported 47.1 million less in Reserves than a year ago. This is greater than half of annual global mine output.
- Of the eight largest gold producers, the loss of Reserves in all but one exceeded each company’s entire output in 2014.
These are telling trends because most of the world’s physical gold comes from mining.
Investor Key: It doesn’t take a rocket scientist to see that supply will be unable to meet demand—and in turn push gold prices higher.
Gold Fact #9: Central Banks Are Again Net Buyers
Central banks were net buyers of gold for 21 consecutive quarters. But holdings began dropping in 2009, and by mid-2013 they were net sellers.
However, look what’s occurred since then…
For the past two years, global central banks have bought more gold than they sold. And the trend has picked up steam in 2015.
Investor Key: We should mimic the behavior of central banks and add physical gold to our portfolio. Regardless of what they may say in public, their actions tell us they see a need to increase their bullion holdings.
The Facts Say Gold Is an Unbeatable Store of Value and a Must-Own Investment
The facts about gold clearly indicate gold is a good long-term investment. I suggest buying gold now, before mainstream investors inevitably flood back into this market and push the price much higher.
For convenient reference, here’s a summary of the facts covered in this article:
|Gold is not a commodity||Gold isn’t consumed like other commodities. Its #1 use is for investment.|
|Gold is money||Physical gold has zero default risk. Every other asset is subject to default.|
|Gold is the oldest financial asset||Gold lasts forever. It has outlived every stock, bond, and currency. It is the ultimate store of value.|
|The gold market is tiny||Value of the annual gold supply is less than the market cap of Walmart. When investors pour into gold, the price will skyrocket.|
|Gold is near a cycle low||Cyclical patterns show the next major move in the gold price is up. Buying gold now is a low risk investment.|
|Gold is undervalued||Adjusting the gold price with a real world measure of inflation shows it is near an all-time low.|
|Investment demand is strong||Demand for physical metal is relentless. The Shanghai Gold Exchange has had greater withdrawals of physical gold than ever before.|
|Production will decline||Exploration cutbacks, production pullbacks, and Reserve declines all point to a supply crunch in the near future.|
|Central banks buying more gold||Government purchases of gold are on the rise.|