Gold: God’s Currency – Part I

This article was originally written in November 2002 for RC Peck’s Fearless Wealth Newsletter.

I’ve been thinking about gold for awhile. It started when gold hit its all time low of around $250 per ounce in 2000. My background is in commodities, so I love when stuff gets really low—like all time low—especially in commodities. The reason is that, unlike a stock, gold won’t go to zero and so your downside risk is limited when its price is at all-time lows.

The problem with talking about something like gold is that no one else wants to talk about it. So that’s what I’m going to do here today. Today I’m going to tackle “What’s the big deal about gold?” This is a very important topic for me and it should be for you, if you would like your money to grow.

Wall Street hates it; the public doesn’t understand it; it’s expensive to pull from the earth (about $270 per ounce in 2000 dollars); it used to be tied to the US dollar (until 1971); the people who bought it at $850 an ounce in 1980 will never touch it again; and most importantly, God only made a finite amount of it (read: supply and demand value driven).

Gold as an investment is misunderstood (like many things in the investment world) because of who the public turns to for explanations: folks who are either in the dark themselves or they just aren’t selling it. Wall Street doesn’t like gold because brokers can’t make money from it. Sure, there are a few gold mutual funds sprinkled here and there, but there aren’t many.

The entire international gold producing industry is very small. Compare the entire gold producing industry to a single company like Microsoft (MSFT). The entire gold industry has around an $85 billion market cap. In comparison, Microsoft, a single large company, has a market cap three times bigger than the entire gold sector. Can you say small? This is a small market, to say the least, which is one of the reasons Wall Street can’t be bothered with it.

The size of the market is part of the reason why Wall Street doesn’t pay attention to it. There isn’t money in it! How many Gold IPOs have you seen in the past ten years? Exactly.

Other than possible exposure to a few gold mutual funds you will not learn much about gold from Wall Street, at least not yet. If you hear anything it might be that gold is dead, which is what a few Wall Street brokers have told me. Since gold is up to $365 an ounce from its low of $250, and some of the gold mining company stocks are up 300% this year alone, you might start to hear a little bit about gold, but still not much.

What’s really cool about gold is that it’s in the beginning of its own real bull market. Gold has been dead for 20 years and it just woke up two years ago. If you want to make money with your money then you will have to learn to buy things when no one wants them and sell them when the guy at the Gas and Sip is acting like a gold expert. When this happens, the market top is near.

So at the very least, you want to be in something that is trending up. Gold has a solid foundation (20 years) and has started to trend up (two years of trending up). If I gave you no more information, this should be enough. But there’s more.

I mentioned it takes about $270 to pull each ounce of gold out of the earth. God knew what He was doing when He made gold. Not even diamonds are as precious. DeBeers wants us to think diamonds are precious but they aren’t. Diamonds are a false commodity but are made to appear rare by DeBeers, which controls the supply (DeBeers is a South African diamond mining consortium that controls diamond distribution worldwide).

Diamonds are a semi-precious stone. However, since DeBeers controls 90% of the world supply, they keep a very tight limit on how many diamonds are allowed in the market at any given time. In addition to the tight supply, DeBeers has a $100 million advertising campaign that builds desire and artificially creates demand. A tight supply plus extensive advertising keeps the rock coveted and expensive.

Just try to get married with a cubic zirconium. Men, don’t try this; it never ends well. Diamond engagement rings weren’t even heard of in Japan in the ‘60s. It wasn’t until (you guessed it) DeBeers started running ad campaigns that the buying habits of Japanese men changed. Well, actually, it’s the wants of women that changed, and since men do what women want, diamonds were, and are now, in high demand in Japan.

There is only a finite amount of gold on this earth; a short supply. Anything in short supply carries value. We as investors need to find value plays, trending plays, and supply and demand plays to grow our money. Gold’s got it all, baby.

Stay tuned next week for gold company suggestions, how to play the gold market, history of the US dollar vs. gold and anything else I can think up.

Lessons:

  1. Don’t expect Wall Street to talk up gold.
  2. Gold should be part of your total portfolio. If it’s not, and someone else is running your money, ask him or her why the hell not? If you manage your own portfolio then put at least 10% of your money into gold, but no more than 20%.
  3. We are in the early stages of this new Gold bull market. Gold has been down and out for 20 years. This will be the decade of gold.
  4. This decade will end with a huge gold speculation top like it did in the late 1970s, and like technology did in 2000 and like bowling alley stocks did in the late 1960s (true story).

To securing your future.

With regards,
RC’s Signature