MARKET ANALYSIS OF INVESTMENTS AND THE FUTURE OF GOLD; a guest comment

We present an interesting guest submission (written on the 5th September 2011), as part of a series of articles published from March 2010.

Orginal article, one of the most visited on our web page, you can read HERE.

Each kind of savings investment has risk.  Consider the following dangers that could affect individual investments.

Bank deposits

Savings deposited in banks devalue continuously over time, despite the promise of interest, which in real terms does not match the official rate of inflation, so that actually in only a few years the value is completely dissipated. The only real beneficiaries of your savings are the top officials of the deposit taking institutions who enjoy an extraordinary increase in personal wealth, through salaries and bonuses, augmented by access to credit at unrealistic rates, including individuals who despite incompetence or fraud in their political background manage to reap high financial rewards from their actions. They often obtain themselves good position in banks.

For those new readers who have not read my article published in May of 2010 on this website, I recommend reading professional books written by dr. Darko Darovec, ‘Taxes are squeezing us to bleed’ (‘Davki nam pijejo kri’), published in 2004, which talks about fiscal policy of the Venetian Republic and its impact on the economy in North- Western Istria.

Part of the book refers to the operation of urban lending institutions (the city corporations of Izola, Koper, Piran, Rovinj, Porec) which encouraged all citizens to invest money in them, but this money benefited mainly the privileged noble ruling classes. Could you recall the similarities?  Even there and then loan institutions had the occasional  losses, but they did not “increase the capital” of the city budget by introducing new or higher taxes.

Stock Market Investment

Words should not be wasted on this type of investment savings. It is enough that I repeat statement from an article published in May 2010, that after the 1929 stock market crash, population of USA did not invested in Stock Market until the end of World War II 1945.

Investing in Property

Certainly the importance of property investment goes before that of investment in gold, but only to the degree and amount that is appropriate for your personal residential use.

Investing in real estate with the aim to rent them are very bad decision, as the profit don’t rich official annual inflation rate. Property also has problems with judicial recovery of unpaid rent and judicial eviction of non paying tenants. Selling real estate is a similar complex nightmare. Revenue in this area generated by the purchase of agricultural land, and then changes in the permitted usage of the land are more or less reserved for the feudal classes of our time.

Gold Investment
Even with investing in gold we face dangers that are typically much larger, as the usually investor in gold has some formal education in economics.

The main danger is listening or paying attention to or receiving advice from the different (personal) banking and stock market consultants who have an economic education. They very professionally assure potential investors that investment in gold is not profitable, and that it is much better and safer to invest in their institutions. There is also going around a campaign of informing the public through the media, which provides false information about the returns of gold. Some weeks ago we witnessed article in ‘a professional column from a well known newspaper’, where they wrote about investments, also about gold and stated that investment in gold this year was lucrative by only 6%. Example: On 4th January 2011 the purchase price for 1 kg of gold was € 34 565,19 and on 3th September 2011 at 15.15 pm the price of gold was € 42 786,52. According to my calculations, the difference of € 8 221,33 was at that time 23.78 %, rather than 6 % as claimed by ‘the professional newspaper’.

It is necessary to understand that these consultants are paid according to the amount of money that they receive from customers, and that they have only one task, which is not to provide for your welfare, since it is contrary to the interests of the banks and its ancient system that favours the ruling elite of the time .

For your own fortune you should take personal charge, by adequate education and mostly by thinking for yourself.

The second danger is subject to emotions of the investor. When a potential investor sees the price of gold, he often decide that the current price is too high, and decides not to buy now, but will wait for better times and lower prices. When the prices do not  fall, but are steadily rising, because of his previous apparently wrong decisions, the investor decides in anger not to buy again. Now, because of disappointment about missing an opportunity to make a small profit, each subsequent day becomes another missed opportunity.

At the same time investor is not aware that savings represent the results of his work in the past and with this decision he gives away the achievement of the past to those who are devaluing money and currency. Such persons usually never invest in the gold.

The third danger I call the balance-sheet effect. Obviously, a formal economic education, especially if it is enhanced with an academic and even with an international title, presents a serious obstacle to investing in gold. The greatest danger is that the people with such education avoid falling in the trap of getting help from personal advisers and they do make their own decision to invest their savings in gold at a time when its price is (too) high. When the gold price increases, they sell the gold only to increase nominal balance-sheet profit seeing only the difference between buying and selling price.Their actions is obviously guided by a subconscious drive, obligation, that they should at the end show profit in concrete numbers or in the sound of bank notes. They do not realise that they would make the best profit by not selling the gold. Probably, because of the company’s positive balance-sheet they are expecting (Pavlovian conditioning) financial reward?

After a while, when the price of gold rises above their selling price they are psychologically not able to buy more. Buying more at higher price would mean seeing red numbers on the balance-sheet and would get them less gold than they had earlier.

People with an economic educational background have engraved in the brain a rule not to buy as the prices are on the rise. The gold price had risen for more than 110 years usually at 6 % per annum. Because of the continuous price rise for gold, there was never a good time to invest, timing was always inappropriate for them.

Risk that the price of gold will fall, almost does not exist, at least not yet!

From the information available to me, the year on year price of gold from 1901 onwards indicates an almost constant increase, which fell only once, and that after nearly tripling in 1980, after the invasion by the USSR of Afghanistan. But even that  final fall in the price of gold stopped at a higher level than the previous highest point.

The golden rule, which we discussed in an article in February this year is that the investment in gold is not to be sold at the time of apparent daily high prices for fictitious profits. Nor for the momentary fall in prices compared to a few months ago. One does not sell gold for the purchase of unnecessary luxury goods or the establishment of a profit. Gold should be sold only when it is life essential.

One buys gold with all available means and not only with surplus wealth.

In gold one does not invest to make a fortune (this happens through the years by itself), but to protect the real value of one’s own savings, and the earnings from work as I already stated in an article in May 2010.

Gold over the centuries always expresses the same value compared to the same goods. This last statement is slightly untrue recently. In the article written in May 2010 I stated the fact that over millennia, it costs the same price in gold to buy a house or clothes. In ancient Rome, a house cost about 12 kg of gold, a tunic and sandals cost an ounce of gold. In 2010 this was still true. Today, no longer.

The price of goods compared with the price of gold fell significantly. Now the price of houses in Ljubljana and the surrounding areas is ​​approximately 6.5 kg of gold (by price data Slonep). The price of an ounce of gold has already reached € 1,388.54, which exceeds the normal price comparison for the standard men’s suits, underwear, shirts, ties, socks and shoes (not luxury products).

Here we are probably not talking (only) about the price effect of the current debt crisis, but more likely about economic fact, which is mentioned in the book OSNOVE EKONOMSKE ANALIZE I POLITIKE (FUNDAMENTALS OF ECONOMIC AND POLITICS ANALYSIS), Publishing house Zagreb 1979, page 149, written by our dear late professor doctor Aleksander Bajt. The same topic was mentioned in newspaper Delo attachments by Bostjan M. Zupancic. In this chapter, Bajt writes about price indices of the time, where from long-term price fluctuations in the USA from 1790 to 1900 follows, that prices of goods fluctuate, but the trend of prices is downward.

This kind of movement was already known before the beginning of capitalism and it is estimated, that exactly the amount of gold which had arrived from the colonies to Europe, can be calculated from its influence on the movement of prices of common goods. Gold based currencies were meant to avoid price oscillations but their bankruptcy after World War II is responsible for inflationary price rises of goods (but of course not of gold).

Bajt also warns that the US dollar lost 3/4 of its value between 1914 and 1979.

I recently came across information that the German Mark lost 98 % of its value from its inception until its replacement by the Euro.

On the 1th September 2005 the purchase price for 1 kg of gold was € 14,984.00 (3,591,000.00 SIT). If you had then invested in  gold the value of a property (apartment), and you didn’t buy the property, with the sale of the gold today you could buy nearly 3 properties (apartments), (and with that your gains would stop, so you should not do that, but keep your gold).
In the future, the real prices of goods will be falling, except food, health services and education. Gold prices will be rising:

• Depending on the amount  of the new money in circulation,
• With introduction of inflation, which is now “assured” in the USA, and will also follow in the EU,
• With the political problems in the EU – change of currency, change in organisational forms,
• With the new quantities (foreign exchange) of reserves in gold for the individual countries.

This last item was marked in an article already in 2010 as one of the major influences on the price of gold in the future. That’s exactly what has happened this summer.

At a time when the gold price was stagnating or slightly declining, two countries have bought huge quantities of gold, which pushed the price of gold sky high in only three weeks. Thus, on the one hand there were enormous quantities of USA dollars on the market and those countries have taken from their reserves and bought gold with them, on the other hand, there has been a physical deficit of gold in the world market.

China, which doesn’t export the gold, but only imports, is a special fact that will in future have a big effect on the rise of the gold price. Their politicians have made a formal request to become members of the London Stock Exchange for gold. In this they will eventually succeed.

On the other hand, there is another phenomenon arising. The amount of jewellery on the market is rapidly increasing, which is certainly a sign of poverty, is creeping into our western civilisation. The amount of gold that individuals privately buy is reducing in quantity (but expressed in nominal currency is increasing). What is causing this? The explanation is very simple. Our income presented in gold is in decline.

This is information on the selling price of gold in the MORO company and data on average net earnings, from the Statistical Office of the Republic of Slovenia.

Date / purchase price of 1kg of gold / the average net monthly salary / in gold

Feb 2006        37850,00 SIT      180193,00 SIT          47.60 g
Feb.2007       16840,00 €        815,68 €                     48.43 g

Feb.2008       20167,00 €        864,43 €                     42.86 g

Feb.2009       23413,55 €        917,15 €                     39.17 g

Feb.2010        25735,29 €       936,77 €                     36.40 g

Feb.2011       31936,37 €         971.83 €                     30.42 g

From the foregoing statement we could see how many grams of gold we could buy in individual years with the average net salary in Slovenia. In February 2011, we have with our salaries earned only 64 % of gold value, compared to 2006.
Considering that on the 5th September 2011 the selling price of gold was € 43,844.62/ kg, and that from last known data the average salary in Slovenia ( May 2011) was € 982.99, we see that now we could buy only 22.42 grams of gold or only 47.11 % of the assets from 2006. So we work and earn in a day less than 1 g of gold.

Let’s look back in time.

From the book written by dr. Darko Darovec it appears that in 1284 the price ratio between gold and silver was 1:12, in 1252 was 1:10, in 1305 was 1:14  and then again in 1326 was 1:10. Today it is around 1:43.

From the book written by dr. Vasko Simoniti and dr. Peter Štih it appears that was average worker’s wage in the years 1500 to 1700 was between 18 to 22 grams of silver per day. On average we can say about 20 g per day. Per month times 25 (there were no free Saturdays), which calculates to 500 g of silver or 41.66 grams of gold at the then applicable average exchange rate of 1:12.

Therefore, a Middle Ages worker was earning 2 times more in gold than a net average salary today in Slovenia.

In the same way your life savings depreciate in value, unless invested in gold.

The situation elsewhere in the EU is not significantly different. Not only that the salary in gold reduces, but there is also a very high unemployment problem for young people, which seriously shows that they will live with their parents for a lifetime. The parents are taking care of children which is furthermore reducing the possibility of savings

This phenomenon has historically been known and the late professor dr. Vilfan gave a lecture at PF in a chapter on the big family. The example is where under the same roof are living three or even four generations of the same family. This was conditioned by the economic situation at that time. That phenomenon with higher living standards slowly disappeared.

This will undoubtedly result in a decrease of the quantities of gold, which will be purchased by people in the EU. The largest percentage of such purchases should be happening in Germany, Austria and Slovenia. The price will not be affected by decline of purchases, because the price will be influenced by big multi ton buyers. In the future we could expect more regular minimum monthly rises in prices of gold, still in the frame or above the level of interest rates for loans, and individual explosive jumps, which will triggered by the big players in the market.

The gold price in the amount of € 100,000 per kg over the next four years is no science fiction but a very real possibility and it may happen sooner.

Because of problems with the economy and the banking system, countries will not be able to more seriously affect the gold market, thus lowering the price of gold. If that mistake was to be made, (an artificial reduction in the price of gold), the market would be flooded with an amount of money which would buy up the undervalued gold, and then its price would rapidly rise again.
All this may seem a good sign for investors in gold.
I estimate such movements of gold as an ill-omened forecast for the gold price in the future, regarding the state of society. I would prefer that the gold price stay in the frame of natural returns, that is 3 to 4 % per year as in nature (forests, fields, orchards).

On the future and with this history, we can not have influence.

Thus, this unfortunately leaves us with only one option and that is to have insurance by saving in gold. Only in this way we’ll be able to afford much needed goods as food and health services as we get older. Services that we are accustomed today, will cease over next 10 years. All will be paid extra.

No one will care for us, so we have to do it ourselves.

Unfortunately, only an unchanging 6 % fortunate minority of the population invests in gold. A survey indicates that 8 percent believes that investing in gold is good.

By the end of the year the purchase price for 1 kg of gold could come close to € 50,000.

In the future people will be divided into two categories, those who have gold and will be able to take care of themselves, and those who do not have it and will live in real life distress.

The gold price is probably one of the most honest things in the world market, reflecting a most realistic value of any individual goods, and there is almost no speculative influence on it. Gold itself is the highest form of materialised solar energy and it is located at the highest point of (economic) pyramid.

In hope that you will fall into the first category. Kind regards until the article in 2012.

(Guest author, lawyer and expert in finance)

The article is copyrighted work of writer and does not reflect the opinions of Moro company.

Translated by: Mirjana Berends