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Gold's Healthy Pullbacks On Long Road To $10,000

December 2011

gold bullionGold will continue rising in value over the coming years for one reason: the primary buyers are purchasing physical gold for wealth preservation, and there simply isn't enough physical gold to satisfy their appetites.

The recent pullback was by no means the bursting of the gold bubble. Bubbles are characterized by months of extended exuberance and consistently higher highs ‒ not the $200 and $300 corrections we've seen in the past few weeks. Such pullbacks are healthy as they indicate gold has much, much farther to go.

Wealth Preservation

Those who buy gold for wealth preservation are happy. Gold has outperformed all other asset classes for most of the past decade (Figure 1). As other asset classes ‒ such as bonds, currencies, and stocks ‒ become more positively correlated to each other, gold continues moving in the opposite direction and, therefore, continues serving its true purpose of wealth preservation effectively.

For the half of the world that will be responsible for gold's eventual five-digit destination (the Chinese, Russian, Middle Eastern, and Indian buyers), gold is doing its job. They are far less concerned about short-term price swings. Their distrust of fiat currencies has not abated just because the U.S. came up with yet another plan for extending the dollar's hegemony.

As the gold holders of the East probably realize, gold is not really rising in value. It is holding its purchasing power much as it has for the past 3,000 years. Currencies are falling in purchasing power against gold. This implies that gold can rise as far as currencies can fall and, since there is no alternative but to continue printing currency to compensate for slowing growth and rising entitlement payments, gold is destined to rise much higher for many years to come.

Gold will continue to rise until the economy is truly healthy again. Talk of deflationary pressures reversing the course of gold is a short-term, Western assessment. Of course, as we've recently seen, when the stock market crashes people sell their winners to cover margin and lately the big winner has been gold.

The Eastern buyers, as well as sophisticated Western investors, are happy with pullbacks as they allow them to buy more gold at attractive prices. The Chinese Central Bank has publicly stated that it plans to raise reserves from 1,100 to 6,000 tonnes of gold. Unofficially, they have stated 10,000 tonnes. They think in terms of decades, not nanoseconds like Western speculators. The Chinese government encourages its citizens to put five per cent of their savings in gold. They are developing infrastructure to make gold ownership as easy as possible and to make the country the most gold mining-friendly country in the world.

Significant Development

Perhaps the most significant development of the past decade, and one that has gone virtually unnoticed in the West, is the Pan Asian Gold Exchange (PAGE) to be hosted in Kunming City, Yunman Province, the gateway to all of Southeast Asia.  This is a game-changing event that is part of China's five-year plan to change the entire face of the gold market. In the west, 100 ounces of paper gold are traded for every ounce of physical. The PAGE will be the polar opposite of this. It will have a 1:1 leverage rate between the renminbi and gold.

We need to think outside the box of this Western-centric fiat thinking and to assume the broader, value-based perspective that gold affords, one that many Easterners have already embraced. This is of course much easier to do when you own physical bullion. Such a vantage point helps to put these pullbacks in perspective. When gold corrects, buy more. When it resumes its long multi-year ascent, be grateful you did.

Nick Barisheff is president and CEO of Bullion Management Group Inc. (www.bmgbullion.com).

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