vs. Promises

Why You Should OwnPhysical Gold

Ownership

MONEX

Tangible Gold

I always answer in two parts. First, I say, “Yes. You should own gold.” Second I

say, “Depending on who you are and how much wealth you have, you prob-

ably want to own gold in any number of these forms, in combination with each

other.” Personally I own physical gold and a range of gold mining shares from

exploration plays to medium sized profitable mining companies to a couple

well run majors as long-term investments. I trade futures and options, as well

as physical gold, as shorter term investments. I do not get involved in ETFs.

Of the physical gold, some is held in one’s own possession in secure locations

and some is held in reputable, secure vaults both inside and outside of the

United States. When we advise clients or manage money for them, we do the

same. Some of my colleagues and clients will substitute gold ETFs for futures

and options. They do not substitute gold ETFs for physical gold.

This report is about the value of physical gold over gold derivatives such as

ETFs. The world is moving increasingly toward electronic transactions, re-

placing money with digital payments and storing important financial records

digitally in third party cloud storage systems whose location and security is

unknown by everyday users. For everything from groceries to wealth man-

agement, we are becoming ever more reliant on an electronic, often wireless

network. Meanwhile the electrical grids worldwide are becoming ever more

overloaded, obsolete, decrepit, and vulnerable to both natural and nefarious

interruptions, shutdowns, and hacking. If the electrical grid goes down, you

Copyright CPM Group LLC 2019.

These reports are produced by CPM Group for distribution by Monex Deposit Company for which CPM Group

receives compensation. The rights to distribution, reproduction, and redistribution rights are ceded to Monex

Deposit Company by CPM Group for these reports. These reports are not for reproduction or retransmission

without written consent of Monex Deposit Company. The intellectual content and property of these reports

remain the property of CPM Group, and they are not for reproduction or retransmission without written consent

of CPM Group. The views expressed within are solely those of CPM Group. Such information has not been

verified, nor does CPM make any representation as to its accuracy or completeness. Any statements non-

factual in nature constitute only current opinions, which are subject to change. While every effort has been

made to ensure that the accuracy of the material contained in the reports is correct, CPM Group cannot be

held liable for errors or omissions. CPM Group is not soliciting any action based on it. Information contained

here should not be relied on as specific investment or market timing advice. At times the principals and

associates of CPM Group may have long or short positions in some of the markets mentioned here.

People ask me what the best way is for

them to own gold: Physical gold stored

by themselves, physical gold stored

elsewhere, gold Exchange Traded Funds,

futures, options, structured products,

mining stocks, or something else.

At least a portion of the gold you own

should be real, physical gold, either in

your possession or someplace where

you can get it.

Electrical Grid Dependability

Cloud Storage for Electronic Transactions

Wireless Networks

JEFFREY M. CHRISTIAN

Vulnerabilites

Managing Partner, CPM Group LLC

“I want to note here

that this report

focuses on gold,

but much of what I

am writing applies

to silver, platinum,

and palladium as

well as to gold.”

Gold Price Chart, 2000 to 2018

cannot even pump gasoline at a

filling station to go somewhere that

still has electricity, food, water, and

shelter. Your life’s records, all of your

wealth, all of your investments, all of

your money are somewhere in a digi-

tal, electronic system that does not

work. Your very identity might not be

able to be verified.

In this environment, owning some

physical gold, holding some of your

wealth in physical gold, having some

of your investment portfolio in physi-

cal gold makes incredible sense – as

much sense as having paper back-

ups of your personal records.

I want to note here that this report

focuses on gold, but much of what I

am writing applies to silver, platinum,

and palladium as well as to gold.

Right now gold is outperforming its

sister precious metals because gold

is more of a financial asset. Industrial

commodities, including precious met-

als that are heavily used in manufac-

tured products, have been harder hit

by investor concerns that the U.S.

and global economy peaked in 2018,

and that the prospects of a

recession and financial problems

emerging over the next several years

will limit demand for these metals.

Gold is seen more as a safe haven

investment in such economic and

financial circumstances, so inves-

tors have shown more interest in

gold than in silver and platinum, for

example. Still the things I write here

apply to these other metals as

well as gold.

Gold Is Unique

Gold is unique. It is unique among financial assets, far different from stocks, bonds, currencies, and other commodities.

Unlike most financial investments,

gold has many functions for investors.

Generally speaking, stocks, bonds,

and other financial assets have one or

two functions for investors: They pay

dividends or interest, if the investor is

lucky, and they may appreciate in

value or price.

Gold provides a range of services to

investors. It is unique among financial

assets in this respect. This is critical

for investors to understand: If you

want to take advantage of all of the

ways that owning gold can help you

in life and your personal finances, you

need to realize that it serves many

functions and that different types

of gold investments are needed to

maximize one’s use of gold as an

investment. Accordingly, you should

think of gold not as a single invest-

ment, but as several discrete invest-

ments. Some of your gold should be

a long-term, buy and hold asset that

helps preserve your overall wealth and

provides insurance or protection from

problems. Other parts of your gold

holdings should be thought of as in-

vestments, shorter investments, and,

for want of a better word, outright

speculations.

Catastrophic insurance

Gold is a safe haven against all sorts of calamities,

personal as well as national and global.

Diversify wealth

One’s wealth is distinct from one’s investments.

Investments are a subset of wealth. Gold helps diversify

one’s wealth as well as one’s investment portfolio.

Diversify the denomination of one’s wealth

Most people have most of their wealth denominated in

only their domestic currency; a few have maybe two

currencies denominating all of their wealth. Some of one’s

wealth should be denominated in gold.

Investment

u Generating short and intermediate term profits

u Diversifying one’s portfolio, reducing overall volatility

in the value of the total portfolio

u As a currency diversifier

u As a hedge against stock and bond market declines

u As protection against inflation

u As protection against financial, economic, and political

issues negatively affecting one’s stocks and bonds

Opportunistic short-term investments

Gold price volatility is comparable to many other

financial assets, including individual stocks, offering the

same sort of shorter term profit opportunities

as other investments.

Gold’s Investment Functions

SILVER PLATINUM PALLADIUM GOLDSILVER PLATINUM PALLADIUMSILVER PLATINUM PALLADIUM GOLD 0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18

$ / Oz

Gold Prices:January 2000 to October 2018

Governments distinguish between central bank gold demand and holdings and sovereign

wealth fund gold demand and holdings expressly because these two types of institutions,

both government agencies, think of gold differently. In fact, in many countries the sovereign

wealth fund is part of, attached to, or reports to the central bank. CPM follows the policies

and practices of governments, central banks, finance ministries, and sovereign wealth funds

in making this important distinction.

In many countries the central bank or monetary

authority would serve as the national market

maker for gold and silver, buying and selling to

companies selling and buying precious met-

als. The People’s Bank of China did this until

2001. The Saudi Arabian Monetary Authority

did it until a few years ago. These central banks

distinguished between their monetary reserves

and their trading inventories, holding them

separate. In this way the monetary reserve as-

sets remained relatively stable, as they should,

while the trading inventories levels rose and fell

as national producers, refiners, jewelers, manu-

facturers, investors and others bought and sold

metal. The central banks understood that there

were important fundamental differences between

their long-term monetary reserves of gold and

SWFs will buy and sell gold on a short-term

basis. They also will buy gold with a 1, 3, or 5

year investment horizon. Thus a SWF may hold

gold in expectation of rising prices over a

multi-year horizon while selling physical,

futures, forwards, or options to take advantage

of short-term downward moves in prices.

Central banks treat gold as a long-term

buy-and-hold monetary reserve asset.

Sovereign wealth funds (SWFs) view gold

as an investment, or a series of investments.

A final portion might be a shorter term,

more speculative or opportunistic

investments.

their shorter term trading positions. In both of

those cases – the PBOC and SAMA – when

the monetary authorities stopped serving as

the national market maker, the trading inven-

tories were added to the monetary reserve

holdings. The central bank or monetary

authority no longer needed trading stocks, so

the metal became monetary reserves. (In both

cases market observers who did not know or

understand all of this reported that the PBOC

and SAMA had bought gold in the market for

addition to monetary reserves.)

Investors are not governments. Investors

typically do not divide responsibilities for their

wealth management and investment portfolio

management between separate entities. But

they should think that way.

[[

One part of it is insurance, against both

catastrophic financial and political

events, but also against smaller personal

problems and dislocations that arise.

A second part of one’s precious met-

als holdings should be a core portion

of one’s wealth.

A third part should be more investment

oriented, rising and falling in volume as

a proportion of one’s portfolio, depend-

ing on economic cyclical shifts.

Gold Investment Portolio Returns on Three Strategies

The chart and table below shows the relative profits that theoretically

could have been generated over the past 38 years, by buying and hold-

ing gold, or alternatively either by buying and selling it to ride the ups and

downs in prices or, if one were particularly bold, buying, selling, and going

short gold to take advantage of the cyclical moves in gold prices. It is

critical to understand that investing in gold need not, and should not, be

an either-or proposition over this. As has been stated repeatedly in this

report, and in CPM research writings over the past four decades, investors

should buy and hold some gold, the gold talked about in this report, as a

long-term physical insurance and wealth preservation asset, while buying

and selling other portions of their gold to generate investment profits.

1 2

3 4

With this in mind, CPM advises clients to think of gold, and

silver, as a series of separate investments. Gold is not just unique as a financial

asset. It also is unique among materi-

als found on earth. It is noble, chemi-

cally speaking: It does not tarnish, rust,

rot, or fade away. It is estimated that

around 90%, virtually all, of the 5.5 billion

ounces of gold mined since the begin-

ning of civilization is still in the hands

of people and somewhat identifiable. It

is held in jewelry, coins, and bar forms.

This compares to less than half of the

silver mined through human history, and

even small percentages of metals like

iron, copper, lead, and zinc, which are

used in fabricated products from which

they have not traditionally been recycled

as intensely as gold has.

People do not lose gold. When they

do, they go find it. Gold and silver have

been used in coinage for millennia. Much

of the silver coined has been lost over

time. Not so with gold. If you lost a silver

nickel, dime, or quarter, back when silver

was used in these coins, you probably

did not spend a lot of time looking for it.

If you lost a gold dollar or $20 gold coin,

you looked until you found it.

Gold does not tarnish, rust, rot, or fade away.

As of

September 2018

from Initial

Investments

$1 Million in

December 1980

LongNo

Shorting

Longand

Short

LongandHold

12,000 %

10,000 %

8,000 %

6,000 %

4,000 %

2,000 %

0

DiversifyMonex has been speaking to the theme Prepare

and Diversify. The world is in an interesting place.

So, too, is the United States of America. The

economy is strong, at least on the surface.

However, there are major structural weaknesses;

cracks in the ice that are very clear and become

more visible as time marches forward. For now, the

center is holding and things are good. However,

while that is the current situation anyone who looks

up even 10 degrees from the surface toward the

horizon sees all the political, economic, financial,

and social problems that we have not been dealing

with as a nation and a world. These issues are

getting worse and seemingly getting closer to the

point where we will have to attend to them.

The obvious reaction of rational people to this

not-really-dichotomous world view is to prepare

and diversify. In reality, that should be a rational

person’s posture in any economic and political

environment or set of circumstances. You never know

when the ice will crack. Waiting until you hear the

sounds of the ice sheets breaking apart beneath your

feet is too late to buy gold, to prepare and diversify.

Sometimes you might want to take on more risks:

Have more of your wealth in stocks, for example.

Other times you might want to be more defensive

and cautious, reduce your exposure to risky assets

like stocks and bonds, and have more of your wealth

in safe haven assets like gold and silver. Now is

one of those ‘other’ times. Anyone who thinks

the risks are not greater now than they have been on

average over most of the past seven decades has

not been watching the news and is qualified to apply

for a job as an exemplar of all that is wrong about the

American educational system.

How Should I Own Gold?

Preparing and Diversifying means making sure that

you own gold and silver, and probably adding to your

positions.

This leads back to that original question: How

should I own gold?

Simply put, physical gold makes the most sense.

Some of your physical gold should be in your own

possession. Some of it should be stored for you at

a secure facility, unencumbered, unallocated or allo-

cated, and clearly identified as your property. Whom-

ever you choose to store your gold for you should

Owning gold derivatives, gold ETFs, or shares in a company that owns gold is far less secure than owning the gold in physical form outright with clear title to it.

In this regard, physical gold is a superior investment to owning shares in gold ex-change traded funds and gold derivatives.

A graphic analogy would be that if someone breaks into your home, you are better off protecting your home by having a Smith & Wesson gun in your hand than you would be holding shares in Smith & Wesson. Physical gold is your protection against somebody or some event breaking into your financial castle: It is present and ready to be used. Gold derivatives and ETFs are not. Some gold derivatives may be exchangeable for physical gold, at a price and with a time delay, unless there is a financial crisis with your counterparty that interrupts that process. In contrast to derivatives, most gold ETFs are not exchangeable for physical gold.

be as reputable as possible: Years of existence and

experience, excellent trade and customer references

will help you determine where to store your metal. I

have additional requirements. The depository must

be owned and operated by smart, unbiased, highly

ethical people. If they espouse irrational and unsup-

portable opinions about government, the economy,

and gold, I do not want them holding my metal nor

my clients’ metal. Examples of smaller and relatively

less well known ‘depositories’ whose owners disap-

peared with their clients’ metal or otherwise proved

disreputable are too common to ignore as a risk.

The Bottom Line Is Simple: You should own physical gold directly. It should be yours.

Pre

pa

re &

Div

ers

ify

The chart here, Gold Investment Demand, high-

lights the simple reality that most investors buy

most of their gold in physical form, as opposed

to via ETFs. ETFs account for a relatively small

share of total investor gold buying in most years.

In 2008 – 2010, when gold investment demand

was so strong that it led to tight supplies of

physical gold in investment demand sizes, caus-

ing prices to rise sharply, more investors turned

to ETFs in order to satisfy their desires to buy

gold. In more normal periods, investors clearly

prefer owning the gold outright, as opposed to

via ETFs. When gold prices fell sharply in 2013,

investors stocked up on enormous volumes of

physical gold, while ETF holders actually sold

enormous amounts of gold. Much of the gold

ETF investors sold in 2013 had been bought at

higher prices: They bought high and sold low.

In contrast, physical gold investors stocked up

on lower priced gold in 2013, just as they had in

Gold Investment Demand

Some investors do not realize

that ETFs are shares in a company.

They are not units of gold that are owned

by the ETF investors.

“

2002 – 2005. When gold prices began rising

once more, in 2016, investors initially bought

gold exposure via ETFs, shifting back toward

physical possession in 2017.

Some investors do not realize that ETFs are

shares in a company. They are not units of

gold that are owned by the ETF investors.

Most ETFs do not allow direct conversion

or delivery of physical gold. If you own ETF

shares and want to take possession of the

gold, you need to undertake at least two

transactions, and pay two sets of fees and

expenses. You need to sell the ETFs, and

separately buy physical gold with the pro-

ceeds of the ETF share sale. Often you can-

not buy physical gold from the same broker

through which you sold the ETFs, so you

also will need to transfer the money from the

stockbroker to the precious metals dealer,

-40

-30

-20

-10

0

10

20

30

40

50

60

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17

Net Investment Demand Less ETFs

Net ETF Investment Demand

Total Net Investment Demand

Million Oz.

Afterword: Silver, TooI want to leave you with a story about the ultimate insurance value of gold. Before I do, let me point out that nearly everything I have written about gold applies to silver too.

usually incurring another fee for

the money transfer. ETFs, conve-

nient to trade, are not an efficient

way to own or take possession of

physical gold.

Additionally, an investor takes on

counterparty risk with ETFs.

These risks exist on several levels

with several different companies

involved in operating the ETFs.

There is the risk one faces with

the ETF: The company you own

shares in. How solid and repu-

table is that company? How long

has it been around? (No gold

ETFs existed before 2014.) Who

runs them, how long have they

been in the business, what is

their reputation in the market, do

they seem knowledgeable, level-

headed, and ethical?

Such counterparty risk does not exist with gold held in one’s own physical possession.

Investors with sufficient resources might consider also owning gold in the form of ETFs, which they can

buy and sell as shorter term investments as described earlier in this report. CPM will sometimes use ETFs

as short-term investment instruments for its clients, although more often we prefer the leverage and other

advantages provided by futures, forwards, and options compared to ETFs.

Extreme Safe Haven Insurance

In a more treacherous time and place, I knew a

man who had a very expensive diamond sewn

into his skin. We spoke about the differences

between gold and diamonds as safe havens,

including as methods of buying or securing

your safety, freedom, safe passage to a safer

location in extreme politically risky places and

times. He had particular, perhaps peculiar,

reasons why a diamond made more sense for

him than gold: It had a higher value in a very

small volume, it was hypoallergenic, and it

would not be detected by a metals scanner if

one wanted to leave a country suddenly. Bar-

ring such extreme situations, gold is a better

store of value.

Gold holds value in a range of crises. As crises

grow more severe, gold continues to rise in

value. Diamonds and other precious stones

have a different price reaction to crises: They

will rise as economic and financial conditions

worsen up to a point, but then fall when things

get really bad. Rising inflation, fear of bank

failures, and other such problems tend to see

diamond and precious stone prices rise along

with gold and silver. In a full-out war, however,

precious stones prices can plunge. Gold in

contrast continues to rise. This is because

gold is fungible: The value of an ounce of gold

is known by all and readily discoverable with a

phone call, a glance at a newspaper, or listen-

ing to the radio news. The value of precious

stones is dependent on the judgment of a

gemstone expert and can vary greatly from ex-

pert to expert. If an ounce of gold is not pure,

What is the legal jurisdiction in

which the companies are or-

ganized and operate, and how

stable are the regulations and

laws governing and potentially af-

fecting the operation of gold ETFs

in that nation or island tax haven?

Then there are risks related to

the intermediaries who manage

the ETF and the stockbrokers

through which you bought and

hold the shares. Such risks

typically do not raise their ugly

heads, except at the very times

of financial market stress when

you most want to have the se-

curity of direct gold ownership.

When financial markets freeze,

as they did in 2008, shares

can be tied up in any number

of ways, including banks and

brokers going bankrupt, as-

sets being frozen, intermediary

credit lines being insufficient to

execute client transactions, and

in other ways.

we all know that refining it costs around $1.50

per ounce, so take $2.00 off the market price

and give me the cash I need to get out of town.

With a gemstone, you might find a diamond

that one dealer said would be worth $10,000

at a different time and place now is said to

be worth $1,000 or less by the dealer you are

speaking to when you need to cash it in. In a

crisis, you may not have the luxury of seeking

out more competitive bids. The dealer may well

know that and use the distress of the time to his

or her advantage.

“The value of gold,

is fungible: The

value of an ounce

of gold is known

by all and readily

discoverable with

one phone call.”

CPM Group LLC

CPM Group is a fundamentally based commodities research shop. We develop our own proprietary estimates

of gold, silver, platinum, and palladium supply and demand on a global basis, drawing on every resource we

can find, including our own extensive list of contacts involved in precious metals around the world. We have

been doing this sort of research and analysis since the 1970s, far longer than anyone else in the business. We

also undertake research in specialty metals, base metals, energy and agricultural commodities. We are known

for our basic fundamental research, a wide range of financially oriented consulting services, and our expertise

in using financial derivatives to structure financing for producers, refiners, industrial users, and investors

interested in either hedging or investing in commodities.

Our investment philosophy is simple: We are value investors who base our decisions on what to buy, sell, hold,

or avoid on the fundamentals of each asset, and the macro-economic, financial and political environmental

factors that we expect will affect that asset’s value. We have concerns, expressed in this report and elsewhere,

about long-term imbalances in government deficit spending, public and private debt, and a wide range of other

economic and political factors. We don’t expect the world’s financial system to collapse, however. That is not

the way the world tends to work. More likely economic outcomes in the real world lie between the extremes

of cataclysmic collapses and nirvana. We advise our clients – and practice what we preach – to have some of

their wealth in gold and silver as an insurance policy against a catastrophic failure, but we also advise them

to invest other portions of their money in precious metals and other assets based on the assumption that that

sort of failure does not occur. We focus on investing based on likely scenarios, but with an eye always open

to outlying events that take the world’s markets by surprise. We have watched investors who were so worried

about a collapse that they missed some of the largest stock and bond market rallies of all times over the past

30 years, while watching their safe haven assets fluctuate eight-fold in value up and down, and then up and

down again. We prefer our clients to buy and sell precious metals and other assets based on cyclical and other

developments, while also maintaining that long-term insurance policy in case the levee breaks.

CPM Group LLC

168 7th St.

Suite 310

Brooklyn, NY

11215

USA

T. 1-212-785-8320

www.cpmgroup.com

info@cpmgroup.com

Conclusion: Gold You Can Hold

You always should prefer to have at

least some of your gold in unencum-

bered physical form. In ordinary times

you may hold some of your gold in

other forms, but the gold that serves

as the core of your precious metals

wealth preservation holdings should

be physical gold, not a derivative like

a futures, option, or ETF. In extraordi-

nary times, such as most people would

argue we are in, you would want more

of your wealth in such physical gold.

In extreme times, which many people

would argue we are racing toward at

present, having physical gold is even

more important.

You want to be as close to having

readily accessible physical gold in your

hand. That is not a future, forward, or

ETF. It is physical gold, in your posses-

sion or held in a depository for you.

That is an aside, and one that only deals with extreme conditions of social,

political, and economic collapse, but it speaks to the point about where along

the spectrum of gold ownership you want to be.

“In extreme times, having physical gold is even

more important.

For more information on gold, and on specific gold, silver,

platinum and palladium investment products, please contact:

MONEX DEPOSIT COMPANY

4910 BIRCH STREET NEWPORT BEACH, CA 92660

(800) 949-4653

www.Monex.com

MONEX