Why Bullion is Outperforming Mining Stocks

Gold is money

Gold is primarily a monetary asset. It has been a universal medium of exchange and store of value for three thousand years, and it backed every major world currency until the twentieth century. The reason for gold’s “rise” to prominence in recent years has little to do with the metal itself; it is occurring because gold provides the ultimate protection against economic mismanagement and currency destruction. In an era of rampant currency creation, gold has resumed its historical role as money. For a full explanation of this phenomenon, go to: “Gold is Money” (www.bmgbullion.com/document/682).

The “cash” component of every portfolio

Because gold and other precious metals do not depreciate in the long term, it should replace the depreciating “cash” component of every investor’s portfolio. Physical, allocated bullion is the foundation of the precious metals investment pyramid (Figure 4) and, given current conditions, it offers more safety and security than government bonds, T-bills and other traditional cash components.

Gold is the anti-currency

In an era of fast money and currency destruction, bullion is real money. Central banks are buying bullion, hedge funds and other institutional investors are buying bullion. And the world’s largest creditor – China – is diversifying out of dollars and buying bullion.

“When the price of gold moves, gold's price isn't moving; rather it is the value of the currencies in which it's priced that is changing.”

– John Tamny, economist, H.C. Wainwright Economics

Most investors’ portfolios are heavily weighted in currency-denominated financial assets (stocks and bonds), but few comprehend the extent of their purchasing power loss. The numbers in Figure 5 may help put things in perspective: in the past ten years, the US and Canadian dollars, the UK pound and the euro have, collectively, fallen more than 70 percent in value if measured in that universal unit of money, gold. In effect, investor portfolios have lost 70 percent of their purchasing power. Currency destruction, while it is accelerating, is by no means a recent event, however. Since 1913 (not coincidentally the year the US Federal Reserve was formed) the US and Canadian dollars have lost a staggering 96 percent of their value. Is this trend likely to come to an end? Not in the foreseeable future.