GoldSilverWorlds had the honour to discuss some important topics related to precious metals with Nick Barisheff, CEO of Bullion Management Group Inc. and author of the book “$10,000 Gold: Why Gold’s Inevitable Rise is the Investor’s Safe Haven” which will be released later this year and isavailable now for pre-order on Amazon.com. This article is the first one in a five part series. The topics that we covered: the current transfer of wealth from paper to hard assets (primarily gold & silver), ongoing currency destruction, tips for low risk-high reward investing, and the ignorance of mainstream media towards gold’s huge advance.
Today’s discussion is based on the primary trend that started at the beginning of this millennium. The fundamental shift that has been taking place since then was the creation of value through paper assets shifting in a gradual way to hard assets, primarily (but not only) gold and silver. Part of the current ongoing dollar devaluation is caused by this disparity between financial assets and gold. Nick Barisheff gave with these rounded numbers to create a high level picture of the scale of the paper asset market versus gold. The market for financial assets should be worth approximately $250 trillion. It includes mortgage bonds, equities, treasury bills and related financial instruments. It contains pure paper assets and does not include real estate or derivatives. Against that $250 trillion stands a nominal value of the gold market of around $4 trillion.
Half of the gold market is owned by Central Banks and half is privately owned. Central Banks account for approximately 500 tonnes gold purchases per year (figures are based on the past couple of years). The gold owned by private hands, is held by a relatively small number of very wealthy families (who mostly hold it for generations). The effect of the above situation on the gold market is that both Central Banks (who became net buyers in 2008 and who are not selling their gold) and the vast majority of privately held bullion is not for sale at any price. So all you’ve got is new mine supply to meet the upcoming [investment] demand. Imagine what happens if you get only a few percentage points move out of the $250 trillion paper market in an attempt to buy gold. Indeed, the only adjustable number in such a situation is the price of gold.
Ongoing currency destruction
As the driving forces of monetary debasement keep going, you will consequently see an unavoidable shift from the $ 250 trillion. That process has been taking place already for several years, but it’s not visible to most people and market participants because mainstream media is under-reporting the clear trend.
Here are some recent facts supporting that trend: Investment Company Institute (ICI) this week released its latest “Weekly Estimated Long-Term Mutual Fund Flows” that shows retail investors are accelerating redemptions from equity mutual funds. Since the U.S. Federal Reserve’s most recent QE pledge (QE3), outflows from equity mutual funds nearly doubled from the two weeks prior ($12.612 billion for the two weeks ending 9/26/12 versus $6.819 billion for the two weeks ending 9/12/12).
And third quarter equity mutual fund outflows of $19.431 billion were the highest of the year, surpassing August’s $19.195 billion outflow. September also marked the 17th month in a row of outflows from US equity mutual funds and the 26th out of 29. [Source: Seekingalpha.com]
Suppose we will face some kind of crisis or black swan event, then that move will speed up considerably. Now all of this is counted without two huge timebombs:
the derivatives timebomb, which is a question of “when” it will blow up, not “if” it will do
the ETFs, which only a few people see coming.
The ETFs are based on borrowed assets, no matter if it is a gold, bond or equity ETF. So you have a double counting here. As long as the middleman (which is the authorized participant) is acting as a market maker, everything works fine. But when the authorized participant becomes insolvent, someone is going to lose money. When that happens, we will see a scenario that is worse than the subprime crisis.
In addition, recent activities by the Central Banks in the US, Europe and Japan have made the currency debasement worse. Nick Barisheff’s conviction is that the latest QE announcement by the US Fed was another proof that the high returns on financial assets like stocks and bonds are now definitely over. As a natural result, gold is becoming the primary go-to asset for wealth preservation. These two opposite evolutions are simply connected with each other; they are like yin and yang.
Gold standard and gold becoming a zero-risk asset.
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Have a good one.
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