Three Year Gold Outlook

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A Look At This Week’s Show:

• Bull market dynamics accelerating.
• Supply and Demand fundamentals supportive.
• Anticipating a reduction strategy in the future.

Click to the Right for the Presentation: 3 Year Gold Outlook Presentation 

The McAlvany Weekly Commentary
with David McAlvany

As many of you know, we recently were giving presentations in the Bahamas and in South Florida, and the suggestion by many of our listeners has been to provide some of the slides from those presentations on line for their review.

What we decided to do today is to actually give that presentation, and for you to know what you missed when we were in the Bahamas discussing the gold market, in particular, and our three-year gold outlook, what we expect to see happen in the gold and silver markets over the next several years.

We are going to go over the supply and demand fundamentals on the metals, and I am just going to go in an orderly way through the slides that were presented there in the Bahamas. We have provided those slides to you, and if you want to follow through those slides as we go this morning, feel free.

Just as an overview, so that you know who the McAlvany Financial Group is, and to give some background on what we offer, we have been in the precious metals business for 40 years. That includes on-shore product that is delivered, stored, using IRA funds. Off-shore, we have two different programs. One is a U.S. based program, Delaware Depository, as well as a Swiss-based program, Global Gold. I was a founding program partner with Global Gold. Delaware Depository offers storage in Zurich, and here in the next few months will offer that in Toronto and Hong Kong.

In addition to our precious metals solutions, we have our on-shore money management, that is, McAlvany Wealth Management, with a focus on asset preservation, with a focus on conservative growth, and global macro thematics being a big part of what we look at in the process of choosing appropriate allocations in the more traditional asset classes.

And of course, we have our information resources which you are all familiar with, the weekly audio commentary, monthly big picture newsletter. Don has been publishing the McAlvany Intelligence Advisor for nearly 40 years. And then once a year we put together a film, When Greed Turns to Fear, Conquering the Chaos, Beyond the Brink, all very fun and exciting titles, and we will begin producing this year’s DVD here shortly, which is, basically, our state of the union, if you will – a look at what we think is happening in the world today, at this moment, and some of the things, practically, that an investor can do.

Today we are going to look at our three-year gold outlook, where we are, and where we are going. Let me just say this. We have been in a bull market for the last 10 years, and this has been one of the more powerful bull markets in history in the metals market, although as we see, as we will look at here this morning, we have, actually, quite a bit farther to go relative to the 1970s, and given the macrodynamics in place today.

What we want to start with is to look at the gold market over the last ten years, just to look at the gradual change, the big change in the price of gold. While we look back and say, okay the difference between almost $1800 today and $250 is pretty extreme, what we know is that it has been very slow and steady. It has been anything but a radical move to the upside.

Just to illustrate that, if we look at 2000, 2001, 2002, in fact, those moves from $273 an ounce, up to six years later, $638 an ounce – it took six years for the price of gold to double the first time. And then, between 2006 and 2010, another four years for the price to double again at roughly $1400 an ounce. And it is our anticipation that we may see the price of gold double in the two-year period between 2010 and 2012. Essentially, what we are seeing is an increase in the rate of change.

This is very significant, because for anyone who is interested in knowing where we are, where we are going. For anyone who is interested in seeing the ultimate trajectory of the gold price, then this is very important to note. The price of any asset that is in a bull market will tend to accelerate as time goes on, and that is exactly what we are seeing here.

It took six years for the price of gold to double the first time, four years for the price of gold to double yet again, two years for it to double yet again, if our estimation is correct, sometime between 2012 and perhaps the early part of 2013. What you will note, particularly, is that when a bull market has reached its full bloom, when it is done, it will see a rate of change of between 100-150% per year.

We are not at that point where the price of gold has doubled n a single year, or even more than doubled in a single year. This is just one of many telltales that the market is getting too far advanced to be of interest for new purchases and probably has more downside than upside. That is what we would say, that we still have a long way to go in terms of a price change, but actually, it is going to be happening on a quicker and quicker basis.

So our encouragement is for anyone who is considering the precious metals market, and is in that phase of hesitating to see if they get better prices, just understand that like any bull market, as you get into an advanced stage, it does not wait around for anyone. So if you are interested, then a decision needs to be made quickly, in advance of what we would view as a third and final stage. Again, if you look at those price increases, it has been incremental, it has been slow, it has been steady. But gradually, it is heating up.

If you look at the actual chart of gold, that is a very impressive picture of any incredibly powerful bull market. You can see a steady two steps forward, one step back, beginning in 2000-2001, with a very low price of under $300 an ounce, and exceeding the 1920 level here recently, we have seen a steady, moderated, two steps forward, one step back.

About 6-8 weeks ago we had sent out a Special Report, a news blast, if you will, just to say that gold had gone down and touched its 65-week moving average, a very significant point, at about $1530. It was our view that from that point forward, the gold price would be moving higher, that technically, that represented a rock bottom support. Lo and behold, the day we sent that out, $1530 marked its low and it has moved up $200-$250 dollars since then. The critical thing about noting this bull market is that if there is an opportunity on the pull-back to add, it needs to be done decisively, it needs to be done quickly, because it simply does not wait around.

If you look at the picture you might say, “Well, that is a very advanced bull market,” if you look at how far it has gone, and how fast it has gone, but as we noted before, it has actually been quite gradual – two steps forward, one step back – over a decade or more.

Supply and demand is what ultimately impacts any market, whether it is a decreasing supply or increasing demand, and in the case of gold, you actually have both. We will talk a little bit about both of these, and look at supply first, and then demand secondly, as a fundamental component.

When you look at supply in the gold market, one of the things that you have to note is that it has been in decline several percentage points per year for the last decade, and it is just this year, 2012, when there is an expected increase in supply coming from new mining projects which have taken 7-10 years to bring up strength. It is expected that this new little up-cycle in supply will have been accomplished, if you will, by 2014, so we are not talking about huge projects that have come on line, but there is an increase of several hundred tons per year that are going to be coming to the market on the basis of new money supply.

The two major components are new mine supply and recycled gold. Of course, anyone who has driven around the United States has seen the phenomenon of just about everybody and his brother buying gold. That is not to say the average man or woman on the street is going out and buying gold as an investment. That is to say there are a lot of kiosks all over the place which are purchasing gold – old jewelry, old silver flatware, etc., and recycling it, paying you a steep discount to the current spot price, and then turning around and melting it down, profiting considerably, and adding that supply into the marketplace. Those two components are very critical – new money supply, as well as recycled product.

The recycled product has taken on a larger and larger role over the last several years, but does tend to come in waves. It comes in waves at significant price levels, so when we got to the old highs of $850-$875, we saw a mad rush of people going into their safety deposit boxes, into their jewelry boxes, looking for the out-of-date jewelry and taking it down the street, and melting it down for what they considered to be top dollar at the time.

In retrospect, the price has gone even higher, but we have seen that same sort of liquidation cycle at critical price points, $850 to $875 being the first, simply because that was the old high. Then we had $1000, and that was more or less because it was a round number and people were impressed with it, as they had never seen it before. Then at $1500, another mad rush of people selling gold on that basis, and I am sure we will see another increase at around $2000 an ounce.

But one of the things that we are noticing is that there is a declining trend, that while it ramped up for ten years, now all of a sudden the safety deposit boxes are empty, jewelry boxes have already been cleaned out, and the old, antiquated, or out-of-style jewelry has already been melted down or exchanged for something that is in vogue today. While it has gone from being at the low side at the beginning of the decade, about 19% of supply, it now, this year alone, is around 38-39% of total supply, and then over the next several years, declining. Those two things have to be looked at.

In total, we are talking about roughly 4,000 tons of new gold that is brought to market every year. These two components are the contributors to that 4,000 tons that are available every year. Roughly 2500 tons are from the mine supply, and 1500 are from the recycling process. You have to understand where it is coming from, but also to anticipate that beyond 2013-2014 there are a number of folks, including the World Gold Council which has suggested, that by 2014 we will have attained peak gold.

I am not sure how to process that, precisely. I don’t know if that is a concept I am particularly open to – peak gold – but the reality is, there are less and less rich ore bodies where you have very rich veins of gold which are easy to mine and are in politically stable environments. There are more and more small finds of gold in very unstable political environments, in places that are very hard to extract, and so the cost of production is incredibly high, the ability to make it profitable is very difficult, and the political risks off the chart.

That is one of the things that has been straining new mine supply versus; for instance, the 1970s where you could go to two places – Russia and South Africa – and in these two countries, there was roughly 90% of the world’s mineral reserves. In the 1970s roughly 70% of gold production coming from South Africa, a huge boom for the wealth building of that country at that time. They have seen peak production, and it has been steadily in decline since the 1980s. That is the problem, that there are no significant ore bodies on the supply side.

On the demand side, this is the other equation. We are looking at fundamental variables. Demand, forever and a day, has been jewelry-related, as well as industrial-related, and these two components, industrial certainly for silver, rather than for gold. Industrial demand for gold does not tend to exceed 10-15% in a big year. Most of the demand is, in fact, jewelry. We mentioned 4,000 tons in current total available gold between recycling and mine production. Roughly 2,000 of that goes, in demand terms, to jewelry. It is the other 2,000 which is split up very unevenly – a small percentage to industrial users, and the remainder to investment demand.

Investment demand is coins and bars. Investment demand over the last several years, the mixture has changed from being central bank-dominant, to individual-dominant, in which individual investors, institutions, family officers, have looked at precious metals and said, “We think we need a hedge. We think we need something to offset losses, volatility.”

In just a minute we will look at these three things that are inspirational, if you will, for the average investor, that is noncorrelated, that gold does very well during periods of low-to-negative real rates of return, and offers an interesting increase in purchasing power, and we will look at each of these in a minute. Jewelry demand has continued to increase. Asia and the Indian subcontinent continue to buy gold, and frankly, it is not just as an investment, although that is coming onstream now very strongly, but this is a traditional asset that people have bought for social reasons, for cultural reasons, even for religious reasons.

Starting with India, this is something in which a woman will wear her wealth, and as she goes into another family in marriage, she actually has something of a dowry, but she keeps this as her personal wealth. Men, as well, will wear jewelry, and often it is a sign of status. It is a symbol of significance in culture, a groundedness, if you will. “This is who I am. This is my presence. We are a family that should be respected.” There is a cultural and social dimension, which really takes price out of the equation, and has kept demand fairly constant.

When you see the numbers coming from China, in terms of what is current demand, it is often reported that demand has been in decline because they are not taking as many tons off the market as they were last year, or the year before, or the year before that. I think this is something that is not accurate, in fact, because what you see is a constant rupee value of gold being taken off of the market, where consumers are taking what they have every year, in terms of saved currency and investing the same amount year after year, after year, after year, in gold and gold jewelry.

But as the price of gold is increasing, quite obviously, there are less ounces involved. You are getting less gold for the money that you are investing. On that basis, there is less demand for tons, but in terms of dollar values, or rupee value, the demand is actually quite constant.

The big increase in the Indian subcontinent, and within Asia – China, Hong Kong, and throughout Asia – is for investment gold. This would be coins, this would be bars, not something that you would wear, but you might store in a home vault or in a back vault, or what have you. A lot of this is in response to the inflationary trends that they see in that part of the world.

To illustrate, the government of Vietnam has had to limit the amount of gold coming into the country, last year and the year before, as well, with inflation rates between 22% and 25%. Think of that – inflation between 22% and 25% per year. Investors are not inclined to put deposits at the bank. They know that the currency is hemorrhaging and they would much rather have their savings in precious metals.

That has created a bit of a problem because, with the preference for precious metals over the domestic currency, it means there is a stiff competition and the government has actually limited the amount of gold that is allowed to be imported. Of course, black market gold purchases are still thriving, and it continues to be that when a government tries to control a market, there has been, and will continue to be, a way around that there in Asia.

But all that is to say, demand is continuing to increase. Jewelry demand has been fairly constant – roughly 2,000 tons per year – and investment demand, if you go back to something that Jeff Christian used to say, who works for CPM Group, which was once Aron Trading. Aron Trading was a division of Goldman-Sachs, and was ultimately spun off. With the market, and he was speaking specifically of gold and silver, if you see an increase or a decrease, in demand, of even 1-2%, you are defining the trend either up or down.

All of that is to say, markets are made at the edge. Markets are made at the margin. If you see a small increase in demand, then the price is moving up, and that is, in fact, what we have seen. The charts that we have looked at, and the price statistics we were just discussing earlier, would indicate that there has been a slow and steady increase in volumes for precious metals.

When we talk about noncorrelation, this is one of the reasons why we in the West are interested in gold, as well as in the East. The noncorrelation we are going to start with, is by looking at the change in geography of demand, because one of the significant things that has happened between the 1980s and the present, is that this demand geography has shifted considerably.

This is what I mean by that. Western Europe and the United States once dominated the gold market, and consumed roughly 70% of all available gold. That was at the peak in 1980. Today, we consume less than 30%, between Europe and America, with now nearly 60% being consumed by Asia and the Indian subcontinent. As we were mentioning earlier, the reasons are not just investment. In fact, 2,000 tons per year are in jewelry purchases. This is, again, status. This is, again, family significance. This is, again, religious holidays, national holidays – the reasons that people celebrate and buy on a consistent annual basis, regardless of price.

The change in geography is very significant, because in the West we tend to view gold as an inflation hedge. We tend to view it as a volatility hedge. We tend to view it as it relates to other asset classes. In fact, in the East, what we are seeing happen is that as demand increases there, and decreases, relatively speaking, in the West, it becomes an even more noncorrelated asset. In other words, it is moving for other reasons, and it is not moving in lockstep with the stock market.

Looking at U.S. equities, in particular, at its worst correlation for 2011, are at 86%. In other words, it doesn’t matter if you are a brilliant stock picker, everything was either moving up or down in lockstep. At its worst, gold was correlated to the equity markets about 15% last year, with many years of being even lower, in terms of its correlation. A part of that noncorrelation is now being driven by a change in the demand geography, if you will.

It offers something that is moving outside of the financial markets. Yes, for a day, a week, a month, you can see gold move in lockstep with equity markets, as perhaps people are moving to liquidity, or just everything is moving with one trend. But again, if you look at the chart that we showed, on gold, in particular, silver, as well – what you see is a very divergent trend over the last decade, and something that is truly noncorrelated over the intermediate and long term, where you have assets which have appreciated 400-600%. Contrast that with the S&P 500 and the Dow, which are essentially flat for the decade.

The second point, after noncorrelation, is dealing with negative real interest rates. What do we mean by that? A positive real interest rate – and I emphasize the word real – is what you keep after you pay taxes, and after you have accounted for inflation. With the negative real rate – if you are in a flat interest rate environment, and that we certainly are, given the FOMC’s current zero interest rate policy, or if you are in a period in time where your assets are not appreciating that aggressively, for instance, equities over the last ten years – what you tend to find is that you still pay taxes on whatever gains you have, as meager as they may have been, even if it is just dividend income.

On top of that, you have to account for inflation. When you put those two factors into the equation, if you have a low, single-digit, 1-3%, or even negative, real rate of return, then investors tend to favor precious metals. This has been the case for a long, long time. In fact, if you go back to the Summers-Barsky Thesis, which Kevin and I have discussed on the program many times, Larry Summers and Robert Barsky, these two gentleman put together a great study on the math behind why precious metals do well in a period of low-to-negative real rates of return.

It is easy to understand that when you are forced to take risk in the marketplace, but there is not adequate reward, then oftentimes investors will simply choose to move “to the sideline” and get out of the fray. Again, why take risk if there is no reward for it? So that low-to-negative real rate of return environment is critical, and until we re-emerge into a strong growth cycle, a business cycle that is supportive to growing company profits, and that being a rewarding proposition for share-holders, we will continue to see people say, “I guess I should be on the sidelines with at least a few of my dollars, for the time being.” Of course, that becomes even more true as people are concerned about systemic risk. We don’t have to look very far to see, today, why people are concerned with systemic risk.

The last point we will make is on purchasing power, because this, in terms of a demand side of the precious metals market, is very critical. What we have seen happen over the last ten years is radical expansion of purchasing power for the gold-owner. We are going to redefine terms here a little bit. Everyone likes to look at the current environment that we are in as an inflationary environment, given the activities of the world’s central banks expanding the monetary basis hither and yon.

In fact, our next chart shows that the Federal Reserve has, in fact, done that, on a radical basis, starting in about 2008. We have absolutely exploded to numbers we have never seen before, on our balance sheet. We are coming up on 3 trillion dollars for the Federal Reserve balance sheet, even with an adjusted monetary balance sheet. We are not alone in that. The ECB has actually expanded their balance sheet even more than ours, at close to 3½ trillion, and of course, the Bank of Japan, the Bank of England, and a whole host of other central banks are doing the same thing, and in a sense, to liquefy the system.

All that to say, we would like to think of this as being an inflationary environment, but let’s look at this slightly differently for the time being. Let’s define inflation and deflation, and then look at gold briefly, in a slightly different light. If you define inflation as your money purchasing less and less as time goes on, and deflation as your money purchasing more and more goods and services as time goes on, then the real question is, what is your money? Is your money yen? Is you money euro? Is your money greenbacks? U.S. Treasury bills? Is your money gold and silver?

For many people who have redenominated a part of their savings in precious metals, actually, what we have found is one of the great deflations. Going back to those two definitions, I say deflation, because your money, in gold and silver terms, is buying more and more goods and services as time goes on. That is another way of looking at it, because you could say gold and silver are in a bull market, they are growing.

The other way of saying it is that we are in the context of one of the great deflations. The problem that most people have is having a faulty reference. They still place more confidence in the currency, as a reference, than they should. I am specifically talking about yen, euros, greenbacks, etc. When people look at those currencies they assume that they have some sort of a fixed value, and they can measure a gallon of milk, a gallon of gas, an ounce of gold, against this defined and fixed measure, when, in fact, since 1971, no currency has been fixed to anything. They have all been floating, relative to each other.

That is why this concept of purchasing power is so critical, because when you begin to price assets in something that is a constant – again, not a constant in terms of value, but just relatively scarce, hard to come by – in contrast with the currency, which can be created infinitely with the stroke of a pen, or the stroke of a key on a keyboard, what you see is an increase in purchasing power of real goods.

We have often looked at the Dow-gold ratio, and we will in just a minute, but before we do, one of the charts that I have also included here is this chart of excess reserves of depository institutions, and it is important to look at this, because going back to the 1960s, and certainly before that, we haven’t seen banks as concerned about lending to each other, or lending into the economy, for small business loans, etc., as we have in the last several years, and this is not lightening up in the least.

You may say to yourself, “Banks make money by putting money into the system. Banks make money by loaning to other people and then collecting interest on that.” In fact, we see banks now taking the liquidity that the Fed has provided for them, which is intended to be a stimulant to the economy, and instead of loaning it out, to the tune of 1.6 trillion dollars, they have put it right back on deposit with the Fed.

This tells us two things: One, that they are petrified of the economy and petrified of the current state of affairs, and two, that they are gradually rebuilding their own balance sheets and strengthening themselves, in a period of low interest rates. This is what they did in China during the 1990s in their banking crisis. They lowered rates to the point where the saver, and the funds which should have been directed to the saver, in terms of compensation for their deposits, were, in fact, retained by the banks, and the banks were gradually allowed to rebuild their balance sheets. That is what is happening today. The Federal Reserve system and their zero interest rate policy favors banks, and the gradual reconstruction of strength, if you will, within the banking community.

The third and final note on that chart of excess reserves in depository institutions, is that if you imagine the Hoover Dam and the vast quantities of liquidity, or water, standing behind the Hoover Dam, that is represented by the excess reserves at depository institutions. As, and when, those deposits begin to come into the economy, they have, not a 1.6 trillion dollar footprint, but on the basis of our fractional reserve banking system, they have anywhere from a 3, to 5, to 10, to 12 times footprint, in the economy. Again, this just deals with the velocity of money, the number of times a dollar goes through our economy and through the banking system. That is multiplied because of the way we do our banking, using a fractional reserve banking system.

What we would say is that while we were just discussing deflation, and purchasing more and more with your savings, denominated in precious metals, what we have here is the makings of super-inflation, even hyper-inflation, with the excess reserves in depository institutions coming into the economy at an inopportune time. The irony would be this: As, and when, those deposits come into the economy, they have the first impact of creating impressions that we are returning to normalcy – the economy is growing again – and then you really feel the weight of all the excess money that has been created. A little is good, a lot is not, when it comes to inflation, and that is our fear, that we actually have quite a bit of inflation, in terms of greenback-denominated inflation, in store.

For our last point, we will go back to purchasing power, because this is, essentially, one of the most powerful charts we are going to look at next – the long-term Dow-gold ratio. What is important to see here is that we have been through these trends before. If we go back 100 years, there was a time when paper assets were preferred over tangible assets. Paper assets, specifically, stocks and bonds, were preferred over gold. We saw that in the late 1920s. We saw a great appreciation in equities, which favored the investor who was in paper assets, as opposed to tangibles.

Then in the period of the 1930s, after the market had crashed in 1929, after legislation was put in place in the 1930s, after the FDR administration began to put together a whole regime, there was more concern in the 1930s that we were moving toward an outright dictatorship than at any other time in U.S. history. FDR’s folks, the New Deal folks, were paralyzing investors’ and businesses’ ability to allocate capital. They simply would not do it. We went into this period of freeze-up, of contraction, of gridlock, if you will, and during that period, tangibles, having possession and control of your assets, privately held, portable, things that we take for granted under normal circumstances, those issues were prioritized, and we saw a great bull market in precious metals in 1929 through the 1930s.

Then, of course, 1949, at the end of World War II, actually, after World War II, not as a result of World War II, but actually, as a result of the New Dealers basically taking a back seat, and allowing a new administration to come in and retool for growth, and the command economy of World War II no longer being in place, and there being, again, greater growth prospects for businesses, circa 1946, 1947, 1948. Ultimately, the stock market began to advance from 1949 up until about 1966 – another great bull market in paper assets.

That turned around, if you are looking at the chart, and we went through a bear market between 1966 and 1982, and that was also a great time to be invested in precious metals. Then we went through the greatest of bull markets in paper assets, from 1982 to the year 2000, there on the far right of the chart. Prices in equities at never-before-seen levels, and gold was absolutely worthless by the time we got to the year 2000.

The astute investor and the person who was looking at history might have realized, at a 43-to-1 ratio, and that is, take the Dow stocks, the Dow component, and exchange that for gold, and you would have gotten 43 ounces. That was a good time to be coming into the gold market. In terms of purchasing power, we have had a lot of purchasing power with equities. Now, we are in that reverse trend where we are seeing an increased purchasing power for the gold holder. We have gone from a 43-to-1 ratio, and we are now at a 7-to-1 ratio.

This is what is compelling, because many people will look at this chart and say, “Oh, we have missed the market. We have completely missed the market.” The reality is that if you take that 43-to-1 number, 43, and divide it by the current Dow-gold ratio of 7, what you have done is basically increased your purchasing power six-fold – 43 divided by 7 – you have increased your purchasing power 6 times, or 600%, in equities. Persons who owned gold during this period of time have done very well. Not in dollar terms, but in purchasing power terms.

The fantastic thing is that the way the numbers work, the difference between 43 and 7 is the same difference between 7 and 1. In other words, with the classic ratio of 1-to-1, on the Dow-gold ratio, we have the exact same math, immediately in front of us – a six-fold increase in purchasing power, in a very short period of time, immediately in front of us. That is one of the reasons why I think it is worth studying this chart, but understanding that these are, now, exponential numbers we are dealing with.

We are not dealing here with linear math. The difference between a 7-to-1 ratio and a 1-to-1 ratio, again, 7 minus 1 being 6 – a six-fold increase in purchasing power, immediately in front of us, is exactly equivalent to what it has taken ten years to rack up. So for anyone considering having missed the precious metals bull market, you have to understand how the math works, in terms of purchasing power, to see your primary benefit.

The primary benefit is not in dollar terms. It is not in nominal values. The primary benefit is in the translation of gold ounces, a nonproductive asset, ultimately into productive assets, whether that is real estate, whether that is businesses, whether that is the land, plant, and infrastructure of corporate America, selling at a discount relative to your gold ounces.

Just to illustrate this point again, in terms of purchasing power, we will look, and end here, with the median home price, because what we have is a decline in dollar value of 25%. If we look at the median home price, dollar versus gold terms, there in the right-hand corner, we can see the decline in dollar values, from $219,000 to $164,000. That is the equivalent of a 25% decline. That same decline in gold terms, going back five years, would have cost you 461 ounces to buy the average single-family home, the median existing family home in the U.S. Now it costs you 99 ounces. That is essentially saying that it is a 78% decline, in gold terms, versus a 25% decline in dollar terms.

Another way of looking at that, if you go to the next chart, and this is maybe the positive side of this, is that with your increase in purchasing power, having savings denominated in gold, whereas it would have cost you 461 ounces to buy one house, now for the same ounces you can buy 4½ houses.

The next stop for us is circa 2014-2015 when your 461 ounces, instead of buying one house, and today buying 4½ houses, will buy closer to ten houses – a ten-fold increase in purchasing power, for the average single-family home. We see the same pattern, and that is what we were just talking about, in equities, or in businesses.

Going back to the supply and demand dimension in the precious metals market, noncorrelation is absolutely critical. We have seen a change in geography, and we have also seen a favoring of precious metals during periods of low-to-negative real rates of return. Low-to-negative real rates of return are periods of time when people want to just be on the sidelines, and don’t want to be fully invested in the equities market.

Last and not least, we have purchasing power. The inspiration for people to own gold is because it preserves, and during these periods, increases, purchasing power. That is why we are seeing investors come into the metals market in droves.

We will end with our chart which is our perspective triangle, something that Kevin and I talk about with great frequency. It is what anchors our decisions. It is a simple asset allocation model which says that there are at least three ways, and these are the three most important, in our opinion, of defining the mandates for the jobs, or the goals, that you give your assets.

Number one is growth. Those are the traditional stocks, bonds, mutual funds.

Number two is your liquidity mandate, which is cash, bank accounts, treasury bills, CDs, money markets, etc.

Last, and certainly not least, is insurance, in which we define precious metals – gold, silver, platinum, palladium – as more or less an insurance product. Obviously not in the traditional sense of annuities, or whole life, or things of that nature. But it is something that is an offset, a hedge, for those periods of low-to-negative real rates of return.

Having a balance in your portfolio of these different mandates, even having a third in each of these categories, has the benefit of giving you an ingrained discipline. Precious metals have been growing now for ten years. As you move through a cycle of growth in one particular mandate versus another, you begin to reallocate, you begin to reapportion, from that growth, and put it into the other parts of the investment triangle.

Precious metals have done very well over the last ten years, we anticipate that they will continue to over the next 2-3 years, and our invitation to all of our clients is to engage with us deeply in conversation about what a reduction strategy looks like – not an exit strategy from the metals, but a reduction strategy. As, and when, we get to peak valuation, what does this mean for our investors? You should be looking at maximizing the purchasing power of your “gold-denominated” savings and reapportioning them into other asset classes which are more appropriate in terms of their growth profile.

I have included our performance charts on our Wealth Management side, and this has been 12-14% per year since inception. I will just say this. We created our Wealth Management platform to aid our gold and silver investors in an orderly reduction strategy. If you think of this as a future tense event, not necessarily something that you need to do today, our Wealth Management team is very adept at managing assets under any circumstances. In 2008, 2009, 2010, 2011, and this year, our average rates of return have been 12.28%, up to about 14.07%, and again, this is in a challenged business environment. The purpose of our Wealth Management that we began for our precious metals clients, is to be able to reduce their metals exposure as prices reach their peak, and be able to capture some gains, and move them to greener pastures, so to say.

We will look at this last chart, which is a gold chart, courtesy of Ian McAvity, who is a fantastic technical analyst, rebasing the current precious metals bull market, and comparing it to the last precious metals bull market from 1968 to 1980. What we find is that the move thus far has been beautiful, it has been strong, it has been aggressive, but it has been nothing compared to what we saw in the 1970s and 1980s. That third link higher, that third wave, if you will, in a bull market, takes things, on the basis of a parabolic move, to a level which you can hardly imagine. If we were to see the same percentage increase during this bull market as we did in the 1970s and 1980s, we would have to see gold at roughly $5,479 per ounce to match the same percentage increase of the last bull market.

I would suggest, going back to the supply and demand dimensions of this market, that the base of demand is so much broader, and so much more global, than it was during the 1970s and 1980s, that we may not have the imagination, even in our office, for the ultimate price trajectory of gold and/or silver. Just keep in mind that current prices are, in our view, not only attractive, but particularly from the standpoint of purchasing power, compelling, having anywhere from a 4 to 6-fold increase in purchasing power, immediately in front of us.

That is, in a nutshell, what we discussed, minus the questions and answers, at our conference in the Bahamas. We talked about gold, we talked about purchasing power, we talked about noncorrelation, we talked about negative real rates, and we talked about some of the fundamentals of new gold coming into the market, as well as the increase in the demand equation.

In light of that, for several years, 2-3 at least, we are very, very bullish on the metals. If this is something that you need to engage with proactively, or strategically, with one of our advisors, we have a whole team of folks that have been doing this for over 25 years, on average – an exceptionally talented group of men and women who are very committed to what they do, and do it to the utmost professionally.

If you feel like you need guidance, if you want to review the perspective triangle and how your assets currently fit into that that, if you want to anticipate an orderly reduction strategy as we come into the third and most aggressive phase in the bull market in precious metals, we encourage you to call our office, 800-525-9556, speak with one of our advisors, and get a strategy in place that supports this orderly reduction in order to maximize purchasing power in the years ahead.

Again, this is the gist of the presentation that we gave in the Bahamas. I hope this has been helpful for you to have some visual references. Feel free to scroll back through the charts that we have provided for you, and we will look forward to discussing these things and other issues with you in the days, weeks, and months ahead.