Six Reasons to buy Gold

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ort to dampen economic downturnsand prop up asset prices, may in actmake gold more valuable relative tothese other assets. In our opinion, thereal purchasing power o gold, overthe long term, may rise.

Like most assets, price is deter-mined by demand and

supply. Going orwarddemand or goldmay continue torise, while supplywill remain con-strained as it hassince the begin-

ning o time. Withthis backdrop, lets

explore some specicreasons investors may con-

sider buying gold at todays prices.

Perhaps Magellan shouldnt have beenso surprised. Gold had been moneyor more than 2000 years prior tohis time. Te rst gold coins werestruck in about 700 B.C. in modernday Greece. Troughout recordedhistory, other assets like weapons,spices, art, metals and even oodhave had their day as lead-ing stores o wealth, butgold has endured as thesupreme evidence owealth across all cul-tures and time.

Little has changedtoday. Gold competeswith other assets

stocks, bonds, real estate,and paper currency amongothers as stores o wealth. But in to-days changing and ever more volatileworld, the value o these other assetsmay uctuate more than ever. Whatsmore paradoxically in responseto volatility, the policies o govern-ments and central banks, in an e-

Worth its Weight:

Six Reasons to Buy

Gold Today

Imagine the surprise o the worlds rst circumnavigator, Ferdinand Magellan, when uponarriving on the sandy shores o the present-day Philippines in March 1521 ater the rst-ever Pacic crossing, he was ofered a gold bar and some spices by the native king. Gold it was

a store and show o wealth, even there, even then in uncharted, uncivilized territory, halway

around the world, hal a millennium ago.

by Axel Merk, Merk Investments

MERK INVESTMENTS, LLC | OCTOBER 2012 WWW.MERKINVESTMENTS.COM | PAGE 1

Reason 1: HedgeAgainst Infation

Tere was a time, until World War I,when gold was money and money was

gold, or at least backed by real, physi-cal gold. Ten the need to repay wardebts induced the involved countriesto print money. Countries becamepartially disengaged rom the goldstandard then, and more disengagedwith the onset o the Great Depres-sion and World War II. But printingmoney on a massive scale happenedonly during these crises.

oday, it seems that the crisis isnearly perpetual, and the virtuaprinting presses run all the time. Vir-tual? Yes, you dont even have to printthe money any more; it can simplybe created with the stroke o a key-board. And its become so easy that

trillions in new paper at currencywill be created all to chase the sameamount o goods and services. It maybe worth keeping in mind that thereis no upper limit to the amount odollars that can be created, and to theextent that gold (or anything else orthat matter) is priced in dollars, thereis no upper limit to what the price o


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W o r t h I t s W e i g h t : S i x R e a s o n s t o B u y G o l d T o d a y

gold can be. One estimate calls or$15 trillion to be printed in the nextthree years worldwide. We are gettingever urther away rom the gold stan-dard.

O course, that brings the potentialor uncontrollable ination. Tat is,unless these central banks can mopup the liquidity, withdrawing thecash rom the economy. But in do-ing so, central banks will slow theireconomies a politically unpalat-able scenario. Add to that the crush-ing public debt loads, which inducecountries to inate their way out odebt, that is, to allow their currencies

to depreciate and pay with cheapermoney later, and we have a power-ul mixture or uture ination. Andwhat happens when there is ination or when people anticipate ination?Te price o gold may go up.

Comparatively, the next ve reasonsare relatively simple:

Reason 2: Store oWealthAside rom governments and centralbanks, ordinary citizens o developingnations see gold as the present and u-

ture storehouse o wealth. Moreover,they are buying it in increasing quan-tities as questions loom about theirown currencies, and now the curren-cies o others like the Euro and U.S.dollar.

About 50 percent oworld gold consump-tion is or jewelry,while 40 percent isor investments and10 percent is or in-dustry. India alonebuys some 25 percento all gold produced eachyear. Tat gure is in-

creasing: in 2010 alonethe amount o gold bought by Indiancitizens increased 69 percent rom2009, and Indian households todaycontrol some 11 percent o the totalglobal gold stock. Although demandin India dropped of somewhat in2011 due to new import taxes, de-

mand is growing in China, Rus-sia and other countries or

many o the same reasons.

Reason 3:Central BanksFill Teir Vaults

In part as an attempt to

diversiy their hold-ings and hedge against

the inationary efects oglobal money printing, central banks,or the rst time since the mid 1960s,have become net buyers o gold. From1965 through 2007, they were netsellers o gold. Tese banks, particu-larly in developing countries, want to

ll their vaults with something otherthan paper currency and the ever-riskier bonds o sovereign nations.

Estimates call or central banks to buysome 10 percent o the new

supply o gold each yearCountries like Russia

and Mexico will ac-tively buy bullion inthe world market aswell as directly romtheir domestic pro-ducers, keeping that

new supply of o theworld market.

Reason 4:Protecting YourPurchasing Power

I you look at a long-term chart othe price o gold versus the price ooil, youll notice that over time, andgiven some up and down volatility,

gold and oil move pretty much intandem. Put another way, an ounceo gold buys about 14 barrels o oil,plus or minus would do so today,and has done so or over 50 years.In the early 1960s, gold was $35 anounce, and Saudi oil could be hador less than $3 a barrel.

I you, like most o us, need topurchase energy, college education,

or health care over time items thatcant be articially deated in priceby, say, ofshoring to China, invest-ing in gold may allow your purchas-ing power to keep up with the priceo these key goods and services.More people are guring that out which only adds to the demand orgold.


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Reason 5: Tey AintMaking More o It

Gold is a commodity. Te biggestbugaboo in commodity investing is

that demand eventually begets supply.Tat is, when the price o corn or soy-beans or copper rises, what happens?Farmers plant more corn and soy-beans, and miners mine more copper,

and more copper is recycled you getthe idea. Te supply adjustment maytake a year or two to unold, but ormost commodities, more supply isaround the corner when demand in-creases. As the saying goes: the cureor high prices is high prices, in partbecause those higher prices attractgreater supply rom the market.

For gold, not so much. Even withthe increased worldwide demand orgold as a store o value and an ina-tion hedge, production has remainedrelatively at. Production did doublerom the 1970s to about 2000 to ex-ceed 80 million ounces per year, butthen ell back well below the 80 mil-lion mark in the mid 2000s. Only

recently in 2011, did productionslightly exceed the 2001 peak. Supplygrowth continues at a 5 percent ratein our assessment modest in light osome o the demand gures alreadydiscussed.

Reason 6: It Pays toCover the Field

An allocation to gold provides poten-tial portolio diversication benets.

Te more asset classes you investin, the less chance all o your

holdings will uctuate intandem.

When considering anyinvestment, you should

not only consider thepotential positive andnegative scenariosor that investmentover time, but also

the impact on youroverall portolio peror-

mance. It is about not put-ting all o your eggs in one basket, aswell as picking the right baskets.

It goes without saying that an invest-ment with a positive expected returnis preerred over one with a negativereturn. With gold, the outlook ap-pears avorable or a number o rea-sons as outlined above. Equally im-portant should be how the investment

works with the rest o your portolio;the way the expected return o thisasset moves relative to your existingportolio. Tis relationship is calledcorrelation. Adding assets whose pricemovements have a low correlation, ora negative correlation, to your ex-isting assets may help improve youroverall portolios perormance.

Tink back to beore the recent nan-cial crisis had taken hold: it was greati you held assets that moved lockstepwith one another on the way up. Butwhen the market capitulated in 2008all those assets likely ell together as

well, causing some investors to lose agreat deal o value in their portoliosTe gold price has historically exhib-ited a low correlation with other assetclasses. Tis act makes gold a goodsource o diversication or a porto-lio, and gold may help you protectyoursel against downside risks. In2008, when the S&P 500 lost 37%o its value, gold was up nearly 6%.

Holding a variety o assets, includinggold, the price movements o whichare uncorrelated with one another


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About the Author:

Axel Merk is the President and CIO o Merk Investments,manager o the Merk Funds. Axel Merk is a sought aterspeaker and author on topics ranging rom the economy,gold and currencies to sustainable wealth and personalnance, as well as a regular guest and contributor to thebusiness media around the world.

Te nal word: even though the priceo gold, in the past ten years, has wo-ken up to these trends, and has qua-drupled since the late 1990s, actorssuggesting a strong uture are there.No asset should comprise the major-ity o your portolio, but it may behard to argue against owning at least

some o the precious metal going or-ward.

urns out, Magellans Pacic Islandriends knew what they were doing.



Tis report was prepared by Merk Investments LLC, and reects the currentopinion o the authors. It is based upon sources and data believed to be accurateand reliable. Merk Investments LLC makes no representation regarding theadvisability o investing in the products herein. Opinions and orward-lookingstatements expressed are subject to change without notice. Tis inormation doesnot constitute investment advice and is not intended as an endorsement o anyspecifc investment. Te inormation contained herein is general in nature andis provided solely or educational and inormational purposes. Merk InvestmentLLC does not provide legal, fnancial or tax advice. You should obtain advicespecifc to your circumstances rom your own legal, fnancial and tax advisors. Aswith any investment, past perormance is no guarantee o uture perormance.

Explicit permission must be obtained rom Merk Investments LLC in

order to replicate, copy, distribute or quote rom this document or anyportion thereo.

Published by Merk Investments, LLC, October 2012

2012 Merk Investments, LLC

may smooth out your portolio re-turns over time and help protectagainst catastrophic losses. Be alerted as we explore

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Six Reasons to buy Gold