An Investment Tip for Bill G.
By Marc Faber
THE WORLD'S GOLD MINES PRODUCE ABOUT 2,600 metric tons of gold annually, worth $30 billion. If Bill Gates, beleaguered by Washington, is looking for an investment with a future, he might sell his Microsoft shares and buy two years of gold production. Here's why he would be well advised to switch.
A year ago the fundamentals of the gold market were poor. Persistent selling by central banks bent on diversifying their reserves depressed its price. But recently European central banks stopped unloading the metal. That led to a price surge of 20% from its low, to a recent $320 per troy ounce (31 grams). This marked one of financial history's most remarkable short squeezes, and may be the start of a solid turnaround. There's a strong argument to be made that, sooner or later, we'll see a new bull market for gold.
Let us briefly consider the present fundamentals of gold. All the gold that is above the ground--that is, every bit of it that has been mined since King Solomon's reign--amounts to 120,000 tons, worth $1.3 trillion. The gold is mainly in the form of jewelry and coins, and bars held by central banks. Compare this to the $1.6 trillion market value of the six largest U.S. technology companies: Microsoft, Intel, IBM, Cisco, Lucent and Dell. Or to the $30 trillion value of the global bond market. So there is comparatively little gold around.
Still, as wealth spreads to developing nations, it's logical that demand for gold will grow, particularly for jewelry. Take India, a poor country with a gross domestic product per capita of a mere $300. In 1998 Indians bought 800 tons of gold. That's one gram of gold per person. Now, if everyone in the world bought just one gram of gold per year, it would amount to approximately 6,000 tons, or 2.5 times the annual supply of newly mined gold. Should every man, woman and child in the world decide to buy one ounce, then the demand would be twice as large as all the gold available outside the central banking system.
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Forget antitrust-troubled Microsoft. Gold is on the way back as a store of value.
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Gold, of course, costs money to store and insure; stocks and bonds, by contrast, pay dividends and interest. Indeed, if companies generate earnings in excess of the inflation rate and are reasonably valued, then they probably will deliver over time a higher return than gold. But companies also can be unprofitable. And they can be savaged by inflation, expropriation or taxation.
Similarly, bonds can default or be denominated in an unsound currency. The sum total of credit instruments outstanding globally is growing by about 10% per year. Thus, it doubles in size every seven years and will reach $1 quadrillion in 37 years. The global economy, however, expands by just about 3% per year. Inflation and the growing complexity of our financial system explain part of the disparity. But another part of the bond story is uncontrolled credit expansion, courtesy of our central banks. This sorry condition will lead either to far higher inflation rates or to massive defaults. Consequently, gold will provide the only sound currency. Do not put your faith in the dollar, the euro or the yen, dependent as they are on the whims of ill-informed central bankers and politicians.
That's a longer-term consideration, though. For the present the question is whether the new strength of gold will last. After the recent surge it may run into some profit-taking. Yet, despite the cherished beliefs of short-sellers who have an outstanding short position exceeding 4,000 tons, I very much doubt that we will see gold prices fall below $280 ever again. We have greater demand and we have the fading of the central banks from the market. The downside risk is, therefore, about 10% ; the upside potential is unlimited.
When a market gives a strong signal by breaking out after an extended bear run, the participants usually can't tell at once why such a move occurs. Just the same, the troubles of U.S. equities and the dollar have occurred during gold's upturn. And that may be more than a coincidence.
In the inflation-ridden 1970s, gold was a store of value that hit $850 per ounce. And today I would rather own half the world's available gold than all the world's Internet companies, valued at about $500 billion and (many of them) losing money.
Thus, Bill Gates, go for it--switch your $100 billion into gold. By selling Microsoft, you are getting out of a crowded trade because everybody owns tech stocks. And by buying more than two years of annual gold supplies, you will force the shorts out of business and drive the price close to $1,000.
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