Bullion Basics – Part One
Gold Bullion - A Viable Investment for EMD clients
By Mark MacDonald, EMDA Director,Vice-President of Shareholder Relations, Bullion Management Group Inc.
Dealers of Bullion Bars are not to be confused with coin
dealers and jewellers who sell coins on a retail basis at relatively
high premiums. Bullion Bars dealers sell investment grade
Bullion Bars, commonly gold, silver and platinum, at a small
premium to the spot price. Attractive commission and trailer fee
arrangements are available.
A properly balanced investment portfolio should contain at
least some precious metals component but this currently is often
not the case despite precious metals being the best performing
asset class over the last 10 years. Many professionally managed
“balanced” portfolios contain only the three asset classes: cash,
stocks and bonds.
The most negatively correlated asset class to these three
common asset classes are precious metals, yet many “balanced”
portfolios contain no precious metals component whatsoever. For
the record, there are actually seven asset classes: cash, stocks,
bonds, precious metals, real estate, commodities and collectibles.
Arguably, down the road there may be litigation against advisors
when investors who were represented that they had “balanced”
portfolios find out they were missing key asset classes.
Why is this the case? There are several possible explanations.
One is that it is simply “inconvenient” for a regular adviser or
broker to do so. In many cases, advisors are not aware of or
have not been trained on precious metals. How many times has
an investor called his advisor or broker to buy some physical
gold Bullion Bars only to end up investing in speculative gold
The fact is that currently, there are just not that many active
Bullion Bars Dealers available to deal with and few investors
that realize buying a Bullion Bar for the very first time is less
complicated than purchasing a stock.
So the question on everyone’s mind is: what’s going to happen
to the price of gold? About 10 years ago, I heard the commentary
that despite conspiracy theories and market manipulations, 90%
of the price movement of gold would be inversely correlated to
the US dollar. Generally speaking, this has pretty well been true.
As the price of the US dollar goes down, the price of gold has
gone up, and vice versa. In order to think that the price of gold is
risky then you have to think that the United States is going to start
paying off some of its debt so that the US dollar will strengthen.
This just isn’t going to happen! Gold is bound to go up – I just
don’t know when.
A further consequence of this situation is that gold is not in
a bubble. To the contrary – if only a small portion of the world’s
200 trillion dollars currently invested in financial assets were to
convert to some of the 1.5 trillion dollars of gold available after
allowing for the 1.5 trillion dollars of gold bullion held by central
banks, then the price of gold would soar.
If the US dollar declines in value then everyday prices will rise.
The extent to which the US dollar has lost its purchasing power in
the past is illustrated by the fact that in the 1960s you could get a
new car for $2,500 and a great meal for under $5.
Think of it this way - if you could choose to bury $10,000 of
US dollars for 10 years or $10,000 of gold for the same period of
time, which would you choose?
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