News & Views
Forecasts, Commentary & Analysis on the Economy and Precious Metals
Celebrating our 42nd year in the gold business

March, 2015

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USAGOLD's NEWS & VIEWS newsletter
mk Michael J. Kosares
Editor

"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million can diagnose." - John Maynard Keynes


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The China Syndrome
The groundbreaking series on China's pivotal role in the gold market

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BlackSwans YellowGold
The standard reference on how gold performs during periods of deflation, chronic disinflation, runaway stagflation and hyperinflation

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Gold Chartography 101
The case for gold ownership in ten charts you will never see on CNBC

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How would you invest money you didn't need for ten years?
"Perhaps we spend too much energy trying to foretell the future, and too little trying to be resilient against whatever happens."

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Keynes on the menace
of printing money

How the celebrated economist might have structured his investment portfolio today.

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mkMichael J. Kosares, the author of these articles, has more than 40 years experience in the gold business. He is the founder and executive director of USAGOLD (both the website and gold brokerage service), the author of three books on the gold market, and the editor of "News & Views, Forecasts, Commentary & Analysis on the Economy and Precious Metals," the firm's client letter. He has written numerous magazine and internet essays and is well-known for his ongoing commentary on the gold market and its economic, political and financial underpinnings.

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"I keep six honest serving men
(They taught me all I knew);
Their names are What and Why and When
And How and Where and Who."

– Rudyard Kipling –

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USAGOLD's News & Views newsletter has provided cutting-edge coverage of the gold and silver markets for over 25 years. Its content is widely quoted, re-circulated and sourced at websites all over the world.

Its principal objectives have always been the same – to keep our clients informed of important developments in the gold market, condense the available gold-based news and opinion into a brief, readable digest, and, most importantly, to counter the traditional anti-gold bias in the mainstream media. That formula has won it a loyal five-figure subscription base.

If you would like to become a subscriber, we invite you to sign-up at our registration page. There is no charge for the service and your participation is welcome.

Gold Chartography 101
The case for gold ownership in ten charts you will never see on CNBC

by Michael J. Kosares

"What's past is prologue." – William Shakespeare, The Tempest

These charts summarize gold's impressive performance during the tumultuous first fourteen years of the 21st century. Investors fearing some future Black Monday, a general bank or currency collapse, a 1930s-style economic depression, or a sudden and virulent inflation took precautions by purchasing gold coins and bullion as a form of portfolio insurance. Gold Chartography 101 is a record of that past. At the same time, though, it could very well be a glimpse of the future.

The same uncertainties that drove gold demand throughout the past decade in a half are still with us today. In fact some analysts believe that current global monetary policy is setting us up for another economic crisis far worse than the near full meltdown in 2007-2008. "Focusing all policy efforts on boosting inflation rather than on structural reforms to boost growth," says Paul Singer, the outspoken and highly respected hedge fund manager, "will potentially be seen in retrospect as one of the most inexplicably ridiculous mass delusions in the history of economic and monetary policy in the developed world." Mass delusion, it should be added, quite often precedes the black swan event.

These specially customized charts are drawn with the first-time gold investor in mind. Though the river of gold market analysis runs wide and deep on the Internet, precious little of that content is devoted directly to the most basic rationale for gold ownership.  Here we fill that void in chart form – a quick reference for the first-time investor.

Gold Annual Return 2015

Chart 1 presents a quick overview of gold's annual rate of return from 2001 through 2014. An investment of $100,000 made in 2001 would have a market value today just under $440,000 even with the market correction of the past two years taken into account. The average annual return over the period was just over 12%. By comparison, stocks over the same period (at the 18,000 level for the Dow Jones Industrial Average), averaged a return of just under 4% annually. The 12% annualized return in a no yield environment represented a phenomenal return.

Gold Year over Year

Chart 2 is a magnification of Chart 1. It shows gold's annual gain over the same month in the previous year. Its most telling features are the spikes running concurrent to times of economic and financial stress. One lesson to be drawn from this chart is that the best time to buy gold is when everything is quiet, and the market is declining or running sideways. The largest year over year gains – in some cases 60% to 70% – were realized when gold was purchased on the downslopes. These spikes were accompanied by heavy physical gold demand both in the United States and abroad with national mints and refiners running 24-hour schedules to keep up with coin and bullion demand.

Real Rate of Return on US Dollar

Chart 3 offers the kind of fundamental analysis that drives the thinking of professional investors and portfolio managers. A real rate of return – the gain on yields after inflation – over an extended period of time is essential to maintaining and building wealth. As you can see in this chart, there has not been a real rate of return on dollar savings and highly-rated yield instruments since the 2007-2008 financial crisis, and prior to that true yield was scant. (The blue areas reflect the negative real rate of return.) As a result, investors have been forced to raise their risk profiles – an unhealthy circumstance that also raises the prospect for significant speculative losses and argues persuasively in favor of gold diversification.

Real Rate of Retrun on Gold

Chart 4 shows the impressive real rate of return on gold ownership since 2000. Nothing argues for a gold diversification under the current economic circumstances as forcefully as this single chart. It requires no embellishment. The gold areas above the red CPI bars reflect the real rate of return. (Please see the commentary under Chart 1.)

gold deflation hedge

Chart 5 demonstrates gold's viability as a deflation hedge. During the Great Depression of the 1930s, the price of gold was fixed at $20.67 per ounce, and from 1933 at $35 per ounce. When the general price level fell, it gained in purchasing power simply because of the fixed benchmarks. A second advantage to gold ownership under deflationary circumstances is the metal's status as a stand alone asset that is not simultaneously someone else's liability. Because it is an asset the investor holds outside the financial system, it does not carry the attendant counterparty risk associated with bank deposits, annuities, common stocks, bonds and other financial assets. As such, it might very well be the ideal hedge and safe haven under deflationary circumstances.


If you appreciate the kind of bedrock analysis you are now reading, you would probably enjoy and gain from our e-mail newsletter service which alerts you whenever a new issue is published. It comes free of charge and you can opt out of the service at anytime. Last, we will not deluge you with emails.

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A little USAGOLD history. . . . Pictured are News & Views hard copies from 1999 just before gold began its secular bull market. News & Views first made its appearance at a time when gold-based publications were few and far between. The "Big Breakout" headlined in the November, 1999 issue refers to a price jump from $260 to $330 per ounce. Your editor sees a good many similarities between that period and now.

Gold as disflation Hedge

Chart 6 isolates a recently attained benefit to gold ownership not widely known or publicized – its capacity to effectively hedge against disinflation. As the past disinflationary decade of asset bubbles, financial institution failures and global systemic and sovereign debt risk unfolded, gold proved capable of consistently delivering the goods under disinflationary circumstances. During the 2000s – an era of indisputably disinflationary circumstances – gold rose from just under $300 per ounce in the early 2000s to just over $1900 per ounce by 2011, a gain of over 600%. Since then, gold has taken a breather. As this page is posted in early 2015, it is trading in the $1300 per ounce range -- still up over 400% thus far in the new "disinflationary" century.

Gold as a Stagflation Hedge

Chart 7 depicts gold's utility in the other malady that situates itself between inflation and deflation – stagflation. President Ronald Reagan famously added the unemployment and inflation rates together and called its sum the Misery Index. As the Misery Index moved higher throughout the decade so did the price of gold. At a glance, the chart establishes gold as an effective stagflation hedge to go along with its inflation, deflation and disinflation credentials. The Misery Index more than tripled in that ten-year period but gold, as the chart shows, rose by nearly 16 times.

Gold as a Hyperinflation Hedge

Chart 8 demonstrates the value of gold ownership during a hyperinflationary crisis. The numbers you see in the left axis are not a misprint. At the height of Germany's Weimar Republic hyperinflation, gold traded at 118.23 billion marks per ounce. In 1918, it traded at 87 marks per ounce. Wholesale prices went from 2.34 to 725.7 billion index points in the course of five years. At the height of the inflation, prices were doubling every two days – a nearly immeasurable inflation rate. An individual's life savings could not purchase a newspaper. As you can see by the chart, those who converted their marks into gold early in the process were able to hold on to their savings. Those who did not were left to the destructive forces unleashed by the hyperinflation.

Gold Price and Monetary Base

Chart 9 illustrates the relationship between growth in the monetary base (otherwise known as quantitative easing) and the gold price. Quantitative easing, as you probably already know, is the polite term for printing money, the process that ultimately and without warning unleashed the nightmare German hyperinflation described in the previous chart. The interesting feature in Chart 9 is the sudden and inexplicable divergence between the two data sets starting in 2013. This divergence, in our opinion, presents an attractive buying opportunity for the long-term accumulator of gold, whether or not the money printing creates runaway inflation. Though some might see this chart as depicting a direct correlation between gold and quantitative easing, we see the two as reacting to the same stimulus, i.e., a bad economy. Central banks react by printing money. Investors react by buying gold. Though the Federal Reserve has curtailed its quantitative easing program for now, there is no indication it is off the table permanently.

Gold Price Eras

Chart 10 might be the most important of our grouping in that it helps the first-time gold investor understand what sort of an economy will govern investment portfolio choices for the foreseeable future. When the United States abandoned the gold standard in 1971 and freed currencies to float against one another, the era of central bank monetary experimentation began. We are still in that era. Predicting the course of the economy and the financial markets with any degree of reliability in a fiat money environment is problematic, if not impossible. It is this permanent aura of economic insecurity that has pushed gold demand since the 1970s and driven it to record heights since 2008. Former Fed chairman Alan Greenspan, who understands the nature of monetary experimentation better than most, recently said, "Gold is a good place to put money these days given its value as a currency outside of the policies conducted by governments." Until the monetary system is once again put on a stable footing, gold ownership will continue to be at the forefront of thinking for private and public investors alike – and on a global basis.

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Michael J. Kosares is the founder of USAGOLD and the author of "The ABCs of Gold Investing - How To Protect and Build Your Wealth With Gold." He has over forty years experience in the physical gold business. He is also the editor of News & Views, the firm's newsletter which is offered free of charge and specializes in issues and opinion of importance to owners of gold coins and bullion. If you would like to register for an e-mail alert when the next issue is published, please visit this link.

Disclaimer - Opinions expressed on the USAGOLD.com website do not constitute an offer to buy or sell, or the solicitation of an offer to buy or sell any precious metals product, nor should they be viewed in any way as investment advice or advice to buy, sell or hold. USAGOLD, Inc. recommends the purchase of physical precious metals for asset preservation purposes, not speculation. Utilization of these opinions for speculative purposes is neither suggested nor advised. Commentary is strictly for educational purposes, and as such USAGOLD does not warrant or guarantee the the accuracy, timeliness or completeness of the information found here.



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