(Editor’s note: Here is an article from Drew Mason at ConstitutionalSilver.com)
By Drew Mason
While gold bulls may be an endangered species among traders today, five developments have occurred since the start of the year that may pressure gold and silver prices higher. These are: 1) the Federal Reserve’s commitment to maintain negative real interest rates through 2014, 2) the Fed’s admission that it is abandoning its dual mandate and now embraces “more than 2%” inflation, 3) recurring reports that nations previously considered to be U.S. allies are breaking from American-friendly ranks to buy Iranian oil using gold instead of dollars, 4) for the first time in years a public miner, Endeavor Silver, announced it will withhold the majority of its production because it feels gold and silver prices are too low, and 5) gold bullishness is near five year lows as measured by U.S. Mint demand.
Against this backdrop consider that global allocations to physical metals are essentially zero. How can this be? Virtually every study of global wealth concludes gold is approximately 1% of assets despite the very positive macro backdrop.
To this reality longtime gold strategist Jim Sinclair opined that it is only a question of when, not if, corporations question the wisdom of holding 100 percent of their current assets in fiat currencies that wither in purchasing power (the U.S. dollar has lost 85 percent of its buying power since 1971). At some point it is logical to assume the directors and officers of those companies will look for currencies that have retained wealth. Their search will lead them to gold with newfound appreciation for financial history with the political cover of like-minded central banks leading the charge.
What impact could this have on precious metals? Consider that Microsoft has approximately $50 billion in net cash, Apple has approximately $20 billion, General Electric over $100 billion, Johnson & Johnson $30 billion, Cisco $40 billion, Oracle $25 billion, and Dell $8 billion. These seven firms alone are a proxy for $300 billion in cash. If just these firms decided to move 20 percent of their fiat currency holdings into gold currency, these seven alone would take down two years worth of global gold production at $1750 today.
Where would that leave central bank demand? And retail demand, particularly in Asia should there be zero gold supply? While it may sound crazy to think of these firms as wanting to hold one-fifth of their current assets in gold, history suggests the day is coming when fiduciaries will be grilled as to why they didn’t hold more than 20 percent of their cash in gold given that global debasement “was so obvious.”
In the first two months of 2012, The EU, Japan and Britain printed enough money to buy more than five years worth of global gold supply. It is true that gold is still not recognized as a currency by the International Accounting Standard Board or the Big Four accounting firms, but gold is recognized by central banks as currency. Furthermore ISO’s international currency guidelines already list gold as a currency with its own unique identifying number.
Ultimately these central banks and the financial markets will set financial precedent and leave the defunct accounting rules in the dust. Just as the world recognizes that the accounting metric known as the Consumer Price Index no longer captures inflation, look for U.S. corporations to recognize that the accounting profession misses the reality of gold as currency and move towards the yellow metal for balance sheet preservation.
As positive as that reality is for the metals, the gold supply/demand story has other infrequently mentioned strengths. Media commentators are deluding investors when they speak of global supply as reported numbers are for all intents nothing more than academic. Consider that China, exporting machine in virtually every industry is the #1 gold miner on the planet – yet China does not allow for export of its gold. China views gold as too strategic a financial resource to let it leave the country, but its production is counted in supply numbers. China is not alone in its policy of gold nationalization. Adding in the production from confiscatory countries such as Uzbekistan (A top 10 producer), Venezuela and a growing list of nations, 20% of global gold production never reaches the market.
So while mainstream media may focus on gold production being near record levels, the reality is that annual mining adds barely 1% to above ground gold stocks and notably less ever reaches the market. In a world where paper currencies are growing at much faster rates, the supply/demand dynamic in gold is only getting better for investors.
Contrary to the stereotypical view, gold isn’t about Armageddon at all. Gold is simply about storing wealth in a far more efficient manner than with paper cash. Moreover, monetary fundamentals suggest we are capturing an epic turn in asset classes that could be as positive for metals as the early 1980’s proved to be for stocks and bonds.