Adrian Douglas, Chairman of GATA and author and founder of
Market Force Analysis has given me permission to republish this excellent article
titled: “A Good Time To Buy Gold”. I hope you enjoy reading it as much as I
did. I have a deep respect for Adrian's work and analysis on the gold and silver market. He has received accolades from John Embry and Eric Sprott about his unique algorithm and methodology for analyzing the precious metals markets, and the conclusions he's drawn about the suppression of the price of gold and silver. When Adrian goes out of his way to send a specific message like this one, I urge everyone to read it.
A Good Time to Buy Gold, By Adrian Douglas
Many investors are unsure as to whether gold is a good
investment and if gold will continue its rise in price that started twelve
years ago. Those who have not invested in precious metals may well be thinking
that their investment is too late. Other investors who hold the metal are wondering if gold
will fail to reach new highs.
A reassurance that precious metals are nowhere near their
potential is that the world has in no way started to resolve the massive debt
burden that has been created. Precious metals are one of the few things that
can be purchased that have no counter party risk. I prefer to look at precious
metals from the different view point that paper money is being debased at an
alarming rate due to excessive issuance of paper and it is the precious metals
that are not altered. By holding precious metals, one is able to preserve
purchasing power. In fact, when panic sets in, the rush for precious metals
will actually increase purchasing power.
It is important that investors understand the function of
gold. Gold is unlike any other commodity that exists; it has the unique
property of having no other use except as being held for intrinsic value. Almost
all the gold ever mined in the world is still available above ground. This is the
purpose of gold in that it is held as an asset. Some gold may be used for
jewelry or electronics, but this is a small portion of the available gold and,
in any case, it is always recycled because it is so valuable. The most important thing to understand about
the mechanism of gold buying and selling is that it is central to the world of
finance. If there were to be a drought in the U.S., reducing grain harvests,
the price of grain would rise. Gold, however, is not consumed, and is unaffected by
seasonal variations. Furthermore, the
total stock of gold is large compared to the yearly addition which makes the
supply extremely stable.
In searching for the rationale for investing in gold,
there is undisputable proof as to why gold is the most valuable asset on earth.
This evidence comes from the central banks themselves. The central banks only
hold two assets; one is paper assets, the second is gold. They do not hold soybeans,
oil, orange juice, or any other asset. The only intrinsic asset they hold is
gold. The central banks prefer to operate in terms of paper currency. This
gives flexibility to expand their provision of credit far beyond the ability to repay it. When the
cycle of money expansion comes to an inevitable collapse, the central banks
must return to the ultimate money of gold. Once excessive credit has been
eliminated or reduced, the cycle of credit expansion will begin again. This is how the
central banks operate. We have just entered a cycle of excessive credit
expansion and so the massive credit excess must now be eliminated. They must
also return the gold that has been leased on a leveraged basis. This is the environment
in which precious metals reach their potential. All around the world, central
banks are increasing their holdings of gold. The central banks are the masters
of the universe when dealing with the world’s finances. When the central banks
are owners of only paper money and gold, it is clear that following in their
footsteps must be the most intelligent strategy. The central banks try to slow
down the move into gold by creating sudden and violent sell-offs. Such take downs
are effective against leveraged traders but not those who are serious buyers of
gold. While the central banks are net buyers of gold, we can be certain that
the gold market will continue higher. As I write this article, gold is trading at
$1552. This is likely to be a turning point as gold continues higher. As stated
previously, it is paper money that is losing purchasing power rather than gold
increasing in value. This is assured by the fact that central banks are showing a preference for
gold over paper money. This preference is in its infancy and the equilibrium
has a long way to go to reach its true balance.
By: Adrian Douglas
June 28, 2012