first majestic silver

12 Reasons to Buy Gold Now!

November 30, 2000

1. Gold is Undervalued. Right now, the price of gold is trading at $266 per ounce. The following figures put the current price of gold in historical perspective:

  • From 1979 to 1999, the Average Annual Low for the price of gold was $339 per ounce-$73 and nearly 27% higher than it is today.
  • From 1979 to 1999, the Average Annual price of gold was $386 per ounce-$120 and nearly 45% higher than it is today.
  • From 1979 to 1999, the Average Annual High for the price of gold was $455 per ounce-$189 and more than 71% higher than it is today.
  • In 15 out of the last 20 years, gold exceeded $400 per ounce.
  • The price of gold is actually trading at 1/3 of its all-time high.

2. Reversion to the Mean. Since 1970, gold has predominantly moved in the opposite direction of stocks. History also shows that the prices of both stocks and gold tend to revert to the mean over the long term. A crucial question then arises. When will equities move down to their mean, and when will gold move up? How much would gold have to rise to get to the mean? From 1979 to 1999, the average annual price of gold was $386 per ounce. At the current price, gold would have to rise nearly 42% just to get back to that level.

3. Uncertainty in the Stock Market. Stock markets from New York to Tokyo and back have performed dismally for months. The NASDAQ is in an all-out bear market, yet there are still lingering questions about high stock valuations, indicating the market may have further to fall. Meanwhile, the corrective phase in the Dow and the S&P 500 could evolve into a bear market as well. Should the bear market intensify, more and more investors will look for alternative assets, such as gold. Gold's correlation with stocks has historically ranged from nil to negative, therefore it provides very effective diversification of a stock portfolio.

4. Fear of Inflation. The Fed is clearly concerned about inflation and the markets will eventually come around to the same point of view. Unemployment is at a 30-year low and the labor market is tight as a drum. Oil prices have tripled over the past 18 months. Almost every commodity index has been on the rise. The combination of a tight labor market and rising raw materials prices has not occurred since the 1970s. As inflation begins to build, stocks and bonds will suffer, while traditional inflation hedges, such as gold, will appreciate in value.

5. Demand Fundamentals. Demand for gold continues at near-record highs around the world. The only aspect of gold demand that is not sky-high is investment demand. When macroeconomic conditions bring investors back to gold, they will be greeted by a very tight market.

6. Supply Fundamentals. The physical gold market is actually quite tight. For an entire decade, demand for gold has outpaced new supplies. The low gold prices of the past few years have only contributed to the situation as the price of an ounce of gold has fallen below the cost to produce that ounce of gold in many parts of the world. As a result, thousands of miners have been laid off, particularly in South Africa, and numerous mines have been closed. Moreover, exploration has ground to a halt. Less exploration and lower future production, coupled with curtailed central bank sales, will make a tight market even tighter down the road.

7. Rising Commodity Prices. Commodity prices have been on the rise for months, but gold has not kept pace. Base metals, raw materials and energy prices are all up. Meanwhile, gold prices have been lagging. History has shown that a wide disparity between commodity prices and gold does not persist for long. The price of oil has tripled over the past year and a half. In the final analysis, a significant, sustained rise in oil prices is likely to exert an upward pull on gold prices. An oil price rise also tends to increase inflation. The two major upward moves in the price of oil in the 1970s were accompanied by increases in the price of gold.

8. The Best News in the Dollar is Behind Us. For some time now, the price of gold has languished under the weight of a strong U.S. dollar. Because the dollar is the world's reserve currency and gold is priced in dollars, a strong dollar tends to depress the price of gold. It also attracts investors to U.S. stocks and bonds, particularly Treasuries. With our huge trade deficit, growing oil imports, and newly volatile stock market, the dollar could start losing ground. Should the dollar's decline be sustained, gold will benefit on two fronts. First, because gold is priced in dollars, as the value of the dollar declines, the price of gold will tend to increase. Second, as the value of the dollar declines, foreign investment in U.S. stocks and bonds will decline, adding to the negative momentum in those markets. This will indirectly boost investment demand for gold.

9. Rising Interest Rates. There is an old saying in the investment world: "Don't fight the Fed." Statements coming out of the Fed seem to indicate that, when election season ends, we can expect another round of interest rate hikes. This will create a climate in which stocks and bonds simply cannot thrive. History has shown that rising interest rates often coincide with rising gold prices.

10. World Tensions. The recent outbreak of violence between the Israelis and the Palestinians and the tragic attack of the USS Cole served as a wake up call to many Americans that the world is a dangerous place. These two events also touched off volatility on Wall Street and a short, sharp spike in gold prices. Unfortunately, these two incidents are likely only a small taste of what is to come. To many Americans, it appears that trouble spots have been appearing overnight. Actually, there are a host of potential hot spots and enemies that could cause trouble for the financial markets over the next several years: Iran, Iraq, China-Taiwan, North Korea, Colombia, Libya, India-Pakistan, and Israel just to name a few.

11. America's Mushrooming Trade Deficit. Overlooked in all of the campaign rhetoric about prosperity and easy living, was America's serious and troubling trade deficit. Our trade deficit is approaching unsustainable levels and no one knows for sure what the effects might be. This deficit could potentially lead to a protectionist backlash, foreign dumping of U.S. Treasury Bonds and other U.S. securities, or, at the very least, a sharp decline in the dollar. Gold would perform as a hedge against any of these three scenarios.

12. America's Growing Private Debt. While politicians in Washington brag about the brightening federal debt picture, America's consumer debt is reaching all-time highs-perhaps unsustainable highs that could wreck the "Goldilocks" economy. Revolving (credit card) debt is at an all-time high. Home equity is actually down, despite the rise in home ownership. Bankruptcies are being filed at a record pace. Some 35% of all money in 401(k) plans has been borrowed against. All of this debt could spell trouble for the stock market down the road.

India is perennially the world’s largest gold consumer.
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