REASONS TO OWN GOLD

By John Embry Sprott Asset Management LP June 2010

1. GOLD IS RETURNING TO ITS TRUE HISTORIC ROLE AS MONEY
The role of gold in society was succinctly summed up by J.P. Morgan in 1912 when the renowned financier stated that “Gold is money and nothing else.” Ironically, he made that comment one year before the U.S. Federal Reserve was created. There have been long periods (19802000 being one) when this immutable fact was dismissed. The fact remains, however, that every fiat currency system in history has ended in ruins. Our current experiment seems to be headed down the same disastrous path, thus allowing gold to reemerge as a currency once again.

2. THE INEVITABILITY OF A COLLAPSE IN THE U.S. DOLLAR
The U.S. dollar is the world’s reserve currency and thus anchors the world’s monetary system. Unfortunately, by virtually any measurement we look at, the United States is beyond ?the point of no return’ with respect to its financial position. Imbedded federal government debt of nearly $13 trillion, unfunded future liabilities in medicare, social security, etc. well in excess of $50 trillion and a current budget deficit of over 10% of GDP virtually ensures ongoing massive monetary debasement. When the near bankruptcy of the majority of the fifty states in the union is factored in, the situation looks even more dire.

3. OTHER SIGNIFICANT WORLD CURRENCIES OFFER NO REFUGE
The current travails of the European Union are well advertised. The recent pledge of nearly $1 trillion in potential bailout money by Eurozone members and the IMF in the wake of Greece’s problems, coupled with the fear of contagion throughout southern Europe, effectively disqualifies the Euro from serious consideration. Great Britain is in such disarray that it doesn’t even deserve comment. Japan has a rapidly aging population and embedded government debt that already exceeds 200% of GDP. Even China, that paragon of all things financial and economic, is suspect. As the result of its bank lending spree in 2009, the country is dealing with considerable overcapacity, an emerging inflation issue and a potential bad debt crisis in its banking system.

4. THE DESTRUCTION OF GOVERNMENT BALANCE SHEETS AND THE WIDESPREAD IMPLEMENTATION OF ZERO INTEREST RATE POLICIES MAY ULTIMATELY RESULT IN HYPERINFLATION
As the result of the global financial crisis which enveloped the world between late 2007 and early 2009, the world’s governments were forced to step in and bail out the financial sector while propping up overall demand in the face of the collapse in the private sector. This unfortunately occurred as their own revenue streams were under severe pressure due to the issues in the private sector. To combat the massive deficits that inevitably resulted, widespread quantitative easing (i.e. unfettered money printing) was undertaken. That policy is here to stay and the fiscal deficits in many countries have now reached percentages of GDP that have almost always resulted in eventual currency collapse. Thus, the frightening term ?hyperinflation’ is now being heard with increasing frequency?.

6. INVESTMENT DEMAND FOR GOLD IS RAPIDLY ACCELERATING BUT WE’RE ONLY IN THE EARLY STAGES OF THIS PHENOMENON
Despite the fact that gold has been rising steadily for ten years and sophisticated investors are climbing aboard to protect themselves from the ravages of monetary debasement, conventional institutions and the average citizen remain largely unaware of gold’s utility. When the next leg of the global financial crisis arrives and stocks and bonds come under severe pressure, investment demand for gold could potentially rise exponentially. To facilitate this demand, new gold investment vehicles are being created including the very well received Sprott Physical Gold Trust (see disclaimer).

7. GROWING RECOGNITION THAT MANY PAPER GOLD PRODUCTS DO NOT HAVE THE GOLD BACKING THAT THEY PURPORT TO HAVE
At the March CFTC hearing with respect to position limits on gold and silver on the Comex, Jeffrey Christian of CPM Metals, advertised on his firm’s website as “an expert on precious metals”, openly acknowledged that transactions on the London Bullion Market Association (L.B.M.A.) are minimally backed by available physical gold. Given that the L.B.M.A. has long been regarded as the exchange where physical gold is transacted, that qualifies as a remarkable admission. Investors should also have strong reservations about gold ETF’s, gold pooled accounts and gold certificates where the gold is unallocated and thus not specifically accounted for?.

11. INCREASING SKEPTICISM ABOUT U.S. GOLD RESERVES
The U.S. has long been the world’s largest gold holder with a current reported position of 8,133 tonnes (over $300 billion worth). However, there have been recurrent rumors that the U.S. has mobilized an unknown portion of their gold reserves via swaps to facilitate leasing, a key component in the gold price suppression scheme. The absence of any outside audit of the reserves since the 1950′s and the Fed’s current intransigence towards being subjected to an audit only heighten suspicions that the U.S. does not have nearly as much gold as they claim?.

16. GOLD IS IN AN ESTABLISHED POWERFUL BULL MARKET
Gold is in the tenth year of a powerful bull market since it double bottomed at just over $250 per ounce in early 2001. It is most definitely a stealth bull market as the sentiment remains remarkably subdued, a fact illustrated by an extensive worldwide poll conducted by Commodities Online in the spring of 2010 that revealed that 93% of the respondents expected the gold price to fall. Gold has been climbing a classic “wall of worry”, a climb made steeper by the stout resistance of the anti-gold cartel and the constant negative propaganda emanating from its mainstream apologists.

17. GOLD HAS ENDURED
Gold is indestructible, possesses a high valueto-weight ratio (which makes it easy to store and transport), is not anyone’s liability, can be easily hidden (which has been a considerable attribute in the past) and, most importantly, has provided protection against the destruction of wealth for centuries.

CONCLUSION
The fundamentals for gold are impeccable, the long term technical picture is exceptional and gold remains very inexpensive when compared to almost every other alternative. I expect gold to trade at several multiples of the current price before this bull market breathes its last breath? Read full article here.

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