Gold: It CAN Happen Here

Investors with something to lose are scooping up Gold Bullion right now...

ASSET CLASSES go up and go down, notes Byron King for Bill Bonner's Daily Reckoning, and precious metals are – of course – just another asset class.

Gold and silver move with the economic tides. In the past 30 years, gold has rocketed up and plummeted down, dragging silver with it.

At several points in the past 30 years, things were so bad that gold sellers were like the proverbial Maytag repairman. They led lives of quiet desperation about which no one cared. Because like the late Rodney Dangerfield, gold got no respect.

Heck, between 1999-2002, the British government sold a large amount of its national gold, nearly 395 tonnes (metric tons), for about $275 per ounce. The Bank of England used the proceeds to purchase (ahem) "high-yielding" assets, like bonds.

I suppose it seemed like a good idea to somebody. But really, in hindsight, how dumb was that? The British used to fight wars for gold (the Boer War, for instance). Then the government switched to selling gold and buying bonds. They used to hang people for lesser crimes.

Last March, in 2008, gold sold for over $1,000 per ounce. Then the price retreated 30% as oil rocketed from about $100 to $147 per barrel. But even though gold fell back in price, it was still selling, on average, for almost three times what the British government took in less than a decade ago. You didn't do that with bonds. So the lesson is that we have to keep our eyes open about cycles and trends, even with something like gold.

Just in the past six months, almost every non-precious metal asset class has been headed down. The stock markets have been tanking. Prices for everything from aluminum to zircon are way down. Oil has been bottom- fishing. The world is sliding downhill into deep recession. It's a long litany of bad news out there. Except for precious metals, which have held their own.

Lately, precious metals have been in a stealth rally. It was not front- page news, until last week when gold touched the $1,000 mark again. But the operating Gold Mining firms I recommend to readers of Outstanding Investments, hit their lows in October 2008. And they've all been rising in the markets ever since.

What's going on? It's a worldwide trend. Investors have been flocking to gold and silver. There's a money migration going on. And I mean BIG money is migrating. It's like those herds of zebras or wildebeests or gazelles in Africa. When they migrate, the earth shakes and the ground is just a moving kaleidoscope of hides and footprints. The dust clouds blow high into the sky.

Yes, the world economy might be in a recession. People across the world are worried about their job and security for their family. But other people with big bucks are scooping up gold and silver. Those buyers are looking for investment safety.

Moneyed investors don't trust the world's governments or paper currencies. So they are going with gold and silver. The mines and mints are having trouble keeping up with demand. Exchange-traded funds (Gold ETFs) are buying huge volumes of gold and silver. (And they ought to be buying more. At the margins, at least, it appears to me that even the ETFs are holding "paper" gold rights, as opposed to the real McCoy metal.)

Let's look at silver. In January 2006, the total silver held in ETFs was about 40 million ounces. By January of this year, 2009, the total silver in ETFs exceeds 280 million ounces. That's an increase by a factor of seven in just three years.

The story with gold is just as dramatic. Who ever heard of a gold ETF until just a few years ago? But by the end of 2008, gold holdings of ETFs reached a record level of 1,090 tonnes, according to the World Gold Council (WGC). Thus, ETF holdings now exceed those of Switzerland and many other large and important nations.

In the fourth quarter of 2008 alone, investors purchased ETF gold interests representing 96 tonnes of gold...far more than the total gold reserves of Australia. This followed the purchase of an unprecedented 145 tonnes (more than the reserves of Saudi Arabia) in the previous quarter, according to the WGC. These are astonishing levels of demand, where there was almost none just a few years ago.

Much of the gold in the vaults of the worlds' central banks has accumulated over many decades. Much of the US government gold reserve, for example, dates from the national gold confiscation of 1933 under President Franklin Roosevelt. Roosevelt had a compliant Congress to do his bidding. Eventually, even the Supreme Court backed him up.

So what's that old expression...? Oh yes. "It CAN happen here."

Many other countries of the world are currently Buying Gold, fresh from the mine. Today, China is the world's largest gold-producing nation, and its central bank is buying and building reserves. Russia, too, has a tradition of holding gold and today is acquiring gold from its own mine output and via purchases on international markets. Or look at tiny Qatar, a small nation in the middle of the Persian Gulf. Qatar had only 8 tonnes of gold about three years ago. Now it has 12 tonnes, an increase of 50% in a very short time.

What do the Chinese, the Russians or the Qataris know? They know that they want gold. They can buy it. They will hold it. And they are hoarding it.

I've mentioned on many occasions that I like holding precious metals. I like holding metals as an investment and I just like the feel of the stuff. At the "elementary" level (yep, that's a pun), you can hold physical metals. When I was in South Africa last year, I visited a refining operation and actually picked up a gold brick. It was almost right out of the melting pot. The brick was still warm, and the darn thing weighed about 60 pounds.  That's what I call "useful weight gain".

Too bad I couldn't bring it home with me. But the armed guards at the refinery might have objected.

As for where you gold your Gold Coins, ingots or bars, confiscation and a ban on ownership CAN happen here. It already has happened here in the United States. It might happen again, if things get too rough.