The gold rush will return

It’s easy to be bewildered by the daily noise of the mainstream media. Yet at a time when savings and wealth are threatened by the debt crisis, there is little talk about the real benefits of precious metals as a hedge against the ongoing crisis. People are completely missing the point. What about gold’s fundamental value? What about the real benefits of owning gold? To help put this in perspective, I created a simple but comprehensive framework below, outlining the bullish and bearish factors affecting gold’s “true” value.

An historical evolution is underway, with many important gold-bullish events in recent months despite the horizontal price action. Something that could be of critical importance for the gold market in the years ahead are the proposals to treat gold as a zero-risk asset under the Basel III agreement, which could take place as soon as 01/01/2013. It implies that the banks that are members of the Basel Committee on Banking Supervision should treat gold in the same way as cash or bonds. In order to reduce risks in current uncertain circumstances, those zero-risk assets need to be increased from 6% to 8%. Fundamentally it means that gold again becomes part of the financial system. Agreements between Iran and several eastern nations (Turkey, China, India) to use gold as payment for oil carry similar implications for gold, and could herald a rapid reappraisal of gold’s status among institutional investors, who have long considered it a “risk” asset.

Is it any coincidence that this evolution is taking place in the midst of a declining trust in the banks, as indicated by this graph from The New York Times? It’s simply another sign that the bear market in the financial system continues while the secular bull market in gold goes on.

Meanwhile, governments and banks continue their attempts to fight the debt crisis with even more debt creation, while central bank balance sheets continue to expand. Certain (predominantly Asian) central banks are buying gold, however. Eric Sprott reports that China’s gold imports account for more than half of total available world production (which is some 2,200 tonnes per year, excluding-Russia and China, who do not export their gold). Sprott states that “all of the data supports the fact that the physical market is going to overpower the sellers in the paper market.”

Clearly, gold’s fundamentals became much stronger during the first half of this year. The metal is increasingly regaining a formal role within the financial system. Not long until it’s beyond $2,000/oz.

 

 

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