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Gold Bullion - A Viable Investment for EMD clients

July 24, 2012  
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Bullion Basics – Part One

By: Mark MacDonald, EMDA Director,Vice-President of Shareholder Relations, Bullion Management Group Inc.

Dealers of Bullion Bars are not to be confused with coin dealers and jewellers who sell coins on a retail basis at relatively high premiums. Bullion Bars dealers sell investment grade Bullion Bars, commonly gold, silver and platinum, at a small premium to the spot price. Attractive commission and trailer fee arrangements are available.

A properly balanced investment portfolio should contain at least some precious metals component but this currently is often not the case despite precious metals being the best performing asset class over the last 10 years. Many professionally managed "balanced” portfolios contain only the three asset classes: cash, stocks and bonds. The most negatively correlated asset class to these three common asset classes are precious metals, yet many "balanced” portfolios contain no precious metals component whatsoever. For the record, there are actually seven asset classes: cash, stocks, bonds, precious metals, real estate, commodities and collectibles. Arguably, down the road there may be litigation against advisors when investors who were represented that they had "balanced” portfolios fi nd out they were missing key asset classes.

Why is this the case? There are several possible explanations. One is that it is simply "inconvenient” for a regular adviser or broker to do so. In many cases, advisors are not aware of or have not been trained on precious metals. How many times has an investor called his advisor or broker to buy some physical gold Bullion Bars only to end up investing in speculative gold mining stocks? The fact is that currently, there are just not that many active Bullion Bars Dealers available to deal with and few investors that realize buying a Bullion Bar for the very first time is less complicated than purchasing a stock.

So the question on everyone’s mind is: what’s going to happen to the price of gold? About 10 years ago, I heard the commentary that despite conspiracy theories and market manipulations, 90% of the price movement of gold would be inversely correlated to the US dollar. Generally speaking, this has pretty well been true. As the price of the US dollar goes down, the price of gold has gone up, and vice versa. In order to think that the price of gold is risky then you have to think that the United States is going to start paying off some of its debt so that the US dollar will strengthen. This just isn’t going to happen! Gold is bound to go up – I just don’t know when.

A further consequence of this situation is that gold is not in a bubble. To the contrary – if only a small portion of the world’s 200 trillion dollars currently invested in financial assets were to convert to some of the 1.5 trillion dollars of gold available after allowing for the 1.5 trillion dollars of gold bullion held by central banks, then the price of gold would soar.

If the US dollar declines in value then everyday prices will rise. The extent to which the US dollar has lost its purchasing power in the past is illustrated by the fact that in the 1960s you could get a new car for $2,500 and a great meal for under $5.

Think of it this way - if you could choose to bury $10,000 of US dollars for 10 years or $10,000 of gold for the same period of time, which would you choose?

For more information contact: Mark Macdonald

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