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WHY YOU SHOULD BUY GOLD NOW

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Page 1: WHY YOU SHOULD BUY GOLD NOW€¦ · Why You Should Buy Gold Now A small gold coin is worth far more than most daily grocery store tabs, making it impractical for everyday use. That

WHY YOUSHOULDBUY GOLDNOW

Page 2: WHY YOU SHOULD BUY GOLD NOW€¦ · Why You Should Buy Gold Now A small gold coin is worth far more than most daily grocery store tabs, making it impractical for everyday use. That

Why You Should Buy Gold NowOriginally published by MoneyWeek Research

The investment case for gold is reaching a critical point…

But why own gold in the first place? What about the metal makes it unique and valuable for investors?

In this special report, you’ll learn why gold is so valuable – and why you should own some…starting today.

Gold Is Your Safety NetThere’s an old Wall Street saying: “Put 10% of your net worth into gold and hope it doesn’t go up.”

Unlike dollar cash, physical gold is not the liability of any government. And unlike bank account deposits, it is beyond the risk or control of any bank. You can store it at your home, in a vault, or in a safe deposit box.

Gold does not carry the risk associated with buying an individual company stock or bond – you can lose money on gold, but it will never become worthless.

Also, gold is more portable and easier to sell than real estate. And the costs of owning gold are much lower than the costs of owning real estate.

Ultimately, gold is the only liquid asset that does not carry the risk of being somebody else’s liability.

If you live in the U.S., you could leave your money in the bank, where deposits of up to $250,000 are insured by the government via the Federal Deposit Insurance Corporation (FDIC).

But the 2008 banking crisis showed that even banks are vulnerable. Do you want your money in institutions that are so fragile that the government had to step in to save them from bankruptcy?

And besides the risks of the banking system, there is also currency risk if you’re keeping your savings in dollar “cash” of some sort.

Lately, the dollar has tended to benefit from “safe haven”

inflows when investors get jittery. But across the world, governments, via their central banks, are printing money to bail themselves out of this woeful economic situation, debasing their currencies in the process.

Do you want your wealth stored in an asset whose value is dependent on the intentions of politicians?

Besides, interest rates on bank deposits and government bonds have been so low that you’re guaranteed to lose money due to inflation. And as the European Central Bank and the Bank of Japan set negative interest rates, it becomes more and more likely that the U.S. will follow.

Policymakers are effectively forcing people to speculate. Houses, stocks, and all sorts of other assets have been driven up to prices that can be supported only by artificially low interest rates. Prices no longer bear any relation to earnings – be they wages, rent, or cash flow. It’s only a matter of time before the bubble pops.

The general public doesn’t realize how costly central banks’ ultra-low, and negative, interest rates have become for savers. Higher prices for stocks and real estate don’t show in official measures of inflation. If the government’s consumer price index (CPI) included asset prices, inflation would be far higher. Interest rates would rise.

That is the last thing politicians and central bankers want. They are terrified of the consequences of higher rates. And they are inflating bubble after bubble to create the illusion of wealth.

Gold Keeps Its Value – Unlike PaperMoney serves many functions. But two important ones stand out.

First, money is a medium of exchange. Second, it’s a store of wealth.

Modern digital money is a quite wonderful medium of exchange. It really is. But as a store of wealth, it is rotten.

Gold, by comparison, is a poor medium of exchange. That was the case even when the world was on a gold standard.

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Why You Should Buy Gold Now

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Why You Should Buy Gold Now

A small gold coin is worth far more than most daily grocery store tabs, making it impractical for everyday use.

That is why silver, copper and, later, paper found a monetary use.

But gold is a great store of wealth. Its buying power endures over time.

An ounce of gold would have bought a Roman senator a decent toga and perhaps a pair of sandals.

Today, the dollar equivalent – $1,200 or so – would buy you a very respectable suit and shoes.

Gold’s buying power has lasted over millennia.

Compare that to the dollar. Look at the decline of the U.S. currency since 1913.

What happened in 1913 that kicked things off?

Congress passed the Federal Reserve Act… and established the Federal Reserve System, America’s central bank.

Oil is the most important commodity. The oil price chart above right shows how much oil costs in U.S. dollars versus how much oil costs in gold.

People often think of the oil price as volatile. But look how stable it is if you measure it in gold (blue line on the chart). When you look at the stability of prices in gold over time, it’s no wonder the world economy thrived for hundreds of years under the gold standard.

Not only does gold’s buying power endure… so does the metal itself. It is immutable. It doesn’t tarnish.

A recent discovery in Britain unearthed Icenian gold, buried almost 2,000 years ago. (The Iceni were a Celtic tribe living in Britain during the Iron Age.) The gold stash remained more or less intact – unoxidized and unblemished.

How long would a $10 bill last buried underground? And what about the durability of a cryptocurrency “coin”… vulnerable to hacking, computer viruses, and other threats?

The Golden PyramidIt’s a good idea to have between 5% and 10% of your net worth in gold.

For example, if you own a farm with a lot of land, you may not need as much bullion, as your wealth is in tangible assets beyond the reach of companies, corporations, and governments.

But if much of your wealth is tied up in paper assets, such as cash, bonds, and stocks, it is doubly important to carry a significant amount of bullion.

The more defensive investors may have the entire precious metal component of their portfolio in gold and silver bullion, while more aggressive speculators might have as little as 20%, preferring gold mining stocks instead.

The diagram on the next page shows our suggested portfolio for a gold investor. Remember, this is just a rough guide – your portfolio breakdown will depend on your risk appetite and investment needs.

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Why You Should Buy Gold Now

We recommend physical bullion first. Buying bullion is about insurance. Certainly, gold may well rocket in price in the years to come. But even as your bullion makes a profit, your other investments might be falling.

Next, consider gold exchange-traded funds (ETFs). These are extremely useful vehicles if you’re looking to get exposure to the gold price. But they are not the same as owning the physical metal.

Finally, if you’re looking to profit from a surge in gold prices, you may want to consider gold miner stocks. But keep in mind: It is much riskier to buy a gold miner stock than it is to buy gold.

You are taking on individual company risk and any number of things that can go wrong with a mining company: political problems, workforce problems, environmental problems, technical problems. But there are potentially far greater gains to be had.

Gold certainly is not without risk. But in 2016, gold stocks – having been beaten down so badly for so long – may be one of the surprise sectors in the market.

A Brief History of MoneyPoet Ezra Pound was absolutely right when he said: “In our time, the curse is monetary illiteracy, just as the inability to read plain print was the curse of earlier centuries.”

We need to understand what money was and now is… and how we got to where we are today.

Why do we need money at all?

Barter is a wonderful system. Among its many beauties: It is hard to tax. So, the government can’t get its grubby claws on any deal.

But because barter relies on the “double coincidence of wants” – person A has to want what person B is offering at roughly the same time as person B wants what person A is offering – it is, sadly, impractical on a day-to-day basis.

Let’s say person A is an accountant and person B is a plumber. In a society without money, for any transaction to take place between the two, person B has to want his accounts done within roughly the same timeframe that person A needs some plumbing done. There will be occasions when this occurs, but they will be rare.

Both parties need some means of storing the value of work. This can then be used at a later stage to buy other goods or services.

Numerous barter websites are currently thriving and giving some kind of resurgence to the barter system. But they all rely on some system of storing the value of the work you have done or goods you have sold that can later be exchanged for other goods or services.

In many cases – such as on eBay and Amazon – they use a points system. But what all these boil down to is a different form of money.

The Birth of MoneyLike it or loathe it, a society can’t function without money. Even the most primitive societies developed some kind of payments system.

In tribal and primitive societies, money served as a means for resolving conflicts. As the anthropologist David Graeber puts it in his recent book, Debt, money in these societies was a way to “arrange marriages, establish the paternity of children, head off feuds, console mourners at funerals, seek forgiveness in the case of crimes, negotiate treaties, acquire followers.”

Money was our way of maintaining trust and social cohesion.

Later, as we left tribal societies and began to trade with far-flung strangers, we began to use shells, cocoa beans, various metals – even feathers – as a means of exchange.

Gold Bullion 40-60%

Gold ETFs20%

Gold Miners10-20%

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Why You Should Buy Gold Now

At one stage, Roman soldiers were paid in salt, giving us the word “salary” from the Latin for salt, sal. These early forms of money were “commodity money.”

The most widely and successfully used forms of this money were gold and silver. The words “silver” and “money” are interchangeable in 90 or more different languages: argent in French, plata in Spanish, for example.

Trade was facilitated by the casting of gold and silver coins, which certified the weight and purity of the metal content.

The names of many modern currencies were originally the name of a unit of weight. One pound sterling meant a pound of sterling silver. The dollar derives from the world thaler, an ounce weight of silver originally coined by one Count Schlick in the 16th century.

There are also early examples of “fiat” currencies – currencies whose worth is declared by some ruling diktat or law rather than being based on the underlying value of the metal.

Examples include a system in Sparta, somewhere between 750 and 415 BC, using iron disks… one in ancient Athens based on copper… and one early Roman system based on bronze tablets. In all these cases, the value of the metal in the coins was actually less than the “face value” that was stamped on them.

Eventually, local goldsmiths began offering storage services for gold and silver. The goldsmith would issue a certificate as a receipt for gold placed in his vaults. Over time, people began to use these certificates in the marketplace as though they were the gold itself.

Meanwhile, governments issued such notes under the gold standard, which in the case of the British pound, were considered “as good as gold.”

World trade had slowly moved from a “commodity money” to a “representative money.”

Modern Banking Creeps InIt is at this stage in money’s history that the beginnings of modern banking crept in.

Seeing that few depositors ever removed their gold, using the certificates for trade instead, goldsmiths realized they could make money by lending out certificates against depositors’ gold.

Despite the inherent duplicity in the scheme – lending what is not yours to lend – it worked. The depositors did not lose anything. As long as there was no run on the stored gold, their metal was still safe in the goldsmith’s vault.

But depositors soon wanted their share. Rather than taking back their gold, they demanded that the goldsmith, now in effect their banker, pay them a share of the interest. So, the goldsmith would pay one rate on deposits, then lend at a higher rate. The next stage in the development of banking saw goldsmiths lending out more gold than was on deposit.

The trouble was that, in times of panic, some borrowers demanded their real gold back instead of the paper certificates. Then you had the dreaded run on the bank, with the goldsmith/banker not having enough gold and silver to redeem all the paper he had put out.

It would have been straightforward to outlaw this new lending practice, but the large volumes of credit the bankers had issued made huge European commercial expansion and, indeed, the Industrial Revolution, possible. So instead, the practice was legalized and regulated.

The monetary system had moved on from representative to “debt.” But as the Roman author Publilius Syrus said in the first century BC, “Debt is the slavery of the free.”

Bankers agreed limits on the amount of money that could be lent out. These limits were still far larger than the amount of gold and silver on deposit. Usually, the ratio was nine loaned units to one unit in gold.

This is the essence of the old fractional reserve banking system (now defunct). It was also arranged that, in the event of a run, central banks would support local banks with emergency gold.

Only if there were runs on lots of banks at the same time would the bankers’ credit bubble burst and the system come crashing down.

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Why You Should Buy Gold Now

Gold – a Natural Candidate

By the 20th century, the fractional reserve system, where banks need to hold only a fraction of the money they lend out, had become the world’s dominant banking system.

But at the same time, a more ominous problem was developing: The amount of gold backing the paper money steadily shrank.

Britain came off the gold standard in 1914 because the country needed to print money to pay for World War I. So did Germany.

By 1944, the U.S. and Switzerland were the only major nations left with a currency backed by gold. With the Bretton Woods agreement of 1944, which established monetary order between the major industrial countries at the end of World War II, the dollar became the global reserve currency. It was pegged to gold at $35 an ounce.

But throughout the 1960s, President Johnson and his successor, President Nixon, allowed many more dollars to be issued or printed than they had gold to back them. They needed to pay for their expensive domestic welfare systems and for the war in Vietnam.

And this is where things begin to get really slippery.

The French, under president Charles De Gaulle, recognized this and began demanding gold in return for their dollars at the agreed rate of $35 per ounce.

Initially, the U.S. coughed up. But in 1971, as the run on the dollar sped up, and faced with the rising cost of the Vietnam War, President Nixon removed the dollar from the gold standard altogether.

This move was arguably a breach of the U.S. Constitution, which clearly states that nothing but gold and silver should be money. Article I, Section 10, Clause 1 reads:

No State shall... coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debt.

America’s Founding Fathers, having seen their own currencies collapse, wrote this clause with good reason.

The Era of Fiat Money

Nevertheless, after 1971, for the first time in history, with the exception of the Swiss franc (which has since followed), no currency on the planet, nor any small fraction of any currency, was backed by anything tangible.

The basic nature of money had changed again. We were now in an era where money is money by fiat. That is to say by government edict – by the law. That’s all.

In the past, people had the choice to refuse privately created bank credit notes. But now, legal tender laws declare that citizens must accept this fiat currency as payment.

The value of a fiat currency is determined by how it trades against other fiat currencies on international currency markets.

The status of the money is protected by the fact that governments demand tax be paid in that currency. The status of the dollar was also protected indirectly by U.S. military might and by the price of oil being denominated in U.S. dollars.

Since that fateful day in 1971, debt has ballooned, and there has been nothing to stop it. We have seen the formation of the greatest credit bubble in history – greater than the South Sea Bubble, the Dutch tulip bubble, and John Law’s Mississippi Bubble.

With gold as money, such expansion would never have been possible because there would not have been the gold to pay for it. But with fiat money that can be endlessly issued, there was no such restriction.

The modern monetary system relies on ever-expanding debt to function. Some new money is physically printed, but most money – over 90% – is created digitally by banks.

Say you want to buy a house. You go to the bank with this proposal; they create the money and then lend it to you, receiving the deeds to the house as collateral. You then pay interest on this newly created money that didn’t previously exist. That newly created money then goes into the economy and gets spent.

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Why You Should Buy Gold Now

That’s how the system works. Indeed, a dollar bill is effectively just a credit note. It is a credit note for something intangible, something that doesn’t even exist. It’s rather absurd when you think about it.

There is an idea that successful business ventures create money. But no economic activity has created any money. It has generated revenue, yes. But created money, no.

Only new debt creates new money. Thus, the only way to service the entire debt of the system is for that system to take out more debt. But as debt grows, the cost of servicing it rises and you have this never-ending bubble of expansion that requires people to work harder and harder and businesses to expand and expand until eventually, the cost of servicing the debt becomes too great and the whole system comes crashing down.

That is where we are now.

Governments worldwide are trying desperately to keep the system going by encouraging more and more lending. But they are ultimately doomed to failure.

How to Buy Physical GoldPhysical gold forms a part of a properly diversified portfolio.

Gold remains a universal currency, held by every central bank of note. In the same way that the family home should not be regarded as an investment, gold bullion is not an investment per se, rather a form of “saving for a rainy day” or of financial insurance.

It is to be taken possession of or stored with a secure third party. It should not be traded. One does not trade an insurance policy and thus, as a form of financial insurance, physical gold should not be traded.

Gold is money. It is the ultimate safe-haven asset and a great – if not the best – way of ensuring wealth preservation and for passing wealth from one generation to the next.

Once you have a core holding of gold bullion in a portfolio, you can consider other investments in gold, such as mining stocks, mutual funds, and other more speculative gold investments.

Bullion Coins and Bars

Your first option for owning gold bullion is bullion coins.

These allow you to own investment-grade gold (between 0.90 and 0.9999 fineness) in legal tender coins at a small premium to the “spot” price of gold. (The price quoted in the markets.)

The value of bullion coins and bars is determined almost solely by the price of gold and thus follows the bullion price. Larger bars are not generally taken delivery of due to the cost of insured delivery and the security implications of having very large amounts of bullion outside the chain of integrity (for example, in a private residence).

Gold, silver, and platinum are all available in the form of bullion coins, minted in the U.S., Britain, Canada, South Africa, Austria, Australia, China, and other countries. Most bullion coins are minted in 1/10 oz., 1/4 oz., 1/2 oz. and 1 oz. form (and some can be bought in 2 oz., 10 oz., and 1 kilo).

But 1-ounce gold bullion coins such as Krugerrands or Britannias are by far the most popular for both small investors and high-net-worth individuals, who see the advantages of owning legal tender bullion coins, either in their possession or in depositories, and who recognize the advantages of the divisibility afforded by them.

Coin dealers charge a “spread” between their buy and sell prices. So, it is not the cheapest way to buy bullion.

But if you’re interested in pursuing this option, you can contact Van Simmons at David Hall Rare Coins (www.davidhall.com).

Vaulted Gold And if you want to buy gold, but have the company you buy it from look after it in your name, some of the better options are:

• James Turk’s GoldMoney (www.goldmoney.com): GoldMoney has devised a patent for making and receiving payment in digital gold, which could be the model for the next world banking system when our current one (dead but still feeding) is finally abandoned.

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• Paul Tustain’s BullionVault (www.bullionvault.com): Slightly cheaper than GoldMoney, BullionVault has devised an ingenious method for buying and selling gold and silver to and from other BullionVault users. Charges start from 2.06% over two years.

Semi-Numismatic and Numismatic Gold Coins

A third option is to buy “numismatic” ¬– or older, rare – coins.

You might choose numismatics not only for their precious metal content, but also for their rarity and their historical, aesthetic appeal.

These are “leveraged” to the gold price. This means that the price of these coins will generally increase faster than the gold price in a bull market (due to their historical and aesthetic value and to their rarity) and will decrease by more when gold is in a bear market.

The British Gold Sovereign (originally the 1-pound coin) is the most widely traded and owned semi-numismatic gold coin in the world.

Also highly owned are high-quality pre-1933 gold coins graded MS-65 or better by either the Professional Coin Grading Service or the Numismatic Guaranty Corporation. They are bought by collectors and investors. Most opt to take possession of these older coins, unless they have invested in significant quantities.

Insured delivery of bullion and numismatics usually costs about 1% to 2% of the total value. Insured storage of bullion and numismatic coins in an allocated account will cost about 1% a year. Investors should choose their storage provider carefully, making sure of a high credit rating and high net worth. This leads some to prefer an offshore bank or specialist depository.

Other notable 1-ounce gold bullion coins, pictured above right, include the following: the South African Krugerrand… the Canadian Maple… the American Eagle… the Australian Nugget… the Austrian Philharmonic… the Chinese Panda.

There are other, rarer bullion coins that have collectible value. And a great deal of money can be made from the right investment. But numismatic coins are beyond the scope of this report. You must take your own advice on this.

Again, Van Simmons at David Hall Rare Coins will be able to help here.

How to Buy Gold ETFsA fourth option… and one of the simplest ways to own gold… is to buy one of the many gold exchange-traded funds (ETFs).

An ETF is a fund that trades on the stock market, much like a stock.

In the case of gold ETFs, the fund tracks the price of gold. Effectively, you are buying a share of gold that is stored safely in vaults. There are pros and cons to owning an ETF.

The biggest pro is how easy it is to buy and sell. You simply phone up your broker or go online, type in the ticker symbol, and place the trade.

The con is that you don’t own the bullion in the way that you do with GoldMoney or BullionVault… or if you have it stored in a safe deposit box or at home. Although it is possible, if rather complicated, to actually take delivery of gold from certain ETFs.

As a rule of thumb, use the ETFs as a trading vehicle. For your long-term gold holdings, it’s best to go with either coins or bullion.

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Bonner & Partners is part of the Legacy Research Group

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©2016 by Bonner & Partners. All rights reserved. No part of this report may be reproduced by any means without the express written consent of the publisher. The information contained herein is obtained from sources believed to be reliable. While carefully screened, the accuracy of this information cannot be guaranteed. Readers should carefully review investment prospectuses, when available, and should consult investment counsel before investing.

NOTE: Bonner & Partners is strictly a financial publisher and does not provide personalized trading or investment advice. No person mentioned here by our writers should be considered permitted to engage in rendering personalized investment, legal or other professional advice as an agent of Bonner & Partners. Additionally, any individual services rendered to subscribers of Inner Circle by those mentioned herein are considered completely separate from and outside the scope of the services offered by Bonner & Partners. Therefore, if you decide to contact any one of our writers or partners, such contact, as well as any resulting relationship, is strictly between you and that service provider.

Bonner & Partners expressly prohibits its writers from having a financial interest in any securities they recommend to their readers. All employees and agents of Bonner & Partners must wait 24 hours after an Internet publication and 72 hours after a print publication is mailed prior to following an initial recommendation on a security.

Why You Should Buy Gold Now

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