A Note on the Gold Markets What an Awful Week

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1 A Note on the Gold Markets What an Awful Week Last week was difficult for our precious metal (PM) investments. Both gold and silver suffered the largest two day price drop in years. To further the disappointment, the PM sector has been struggling now for months while US stocks have been soaring since last fall. Let s review the reasons why we have an allocation to PM s and other inflation friendly investments in our portfolios, and double check our rational for this strategy. Skyrocketing Debt Irresponsible Money Printing We are living in an age unlike anything we have seen in our lifetimes. Countries everywhere are straining under immense burdens of debt and trying to pay impossible debt loads and compensate for huge deficits by printing unbelievable amounts of money - money that in most cases is backed by nothing. In the US our Federal Debt is close to $17 Trillion and rising rapidly. Unfortunately the Federal Debt is only the tip of the iceberg Social Security and Medicare unfunded liabilities are estimated at another $100 Trillion and the States add another $4.2 Trillion in unfunded retirement benefits and debt. The numbers are staggering and unfathomable. According the Federal Reserve, quantitative easing (a fancy word for money printing) for this year is projected to be $1T a Trillion new dollars injected into the economy with the hopes of creating a recovery. To put that into contrast, from 1900 through 2008 the US monetary base grew to only $0.8 Trillion. We will print more money this calendar year than was printed in all of the last century! So what does that have to do with our PM investments? Historically gold has always been a form of money, and even today gold functions as a form of currency, especially for the largest global investors the central banks and sovereign wealth funds of the world s largest countries.

2 Page 2 The price of gold therefore is very significant in that it sends a message about the health of the US Dollar. Gold as a form of money in a very real sense competes with the USD. When the price of gold is low and stable the USD is considered sound and safe and there is little demand for gold. However, when the price of gold is volatile and rising it signals that the USD is considered unsafe and is losing value, and there is higher demand for gold. The charts below track the growth of money supply and compare it to the price of gold. The first compares the global money supply vs. gold, the second chart is the USD money supply vs. gold. Note how closely the price of gold follows an increase in the money supply. Growth of Global Money Supply vs. the Price of Gold 1999 through 2013 (Source: Fidelity Investments)

3 Page 3 Growth of USD Money Supply vs. Price of Gold (Actual) & Projected through 2015 Our reason for an allocation to PM investments like gold is simple and clear we hope to diversify and even profit from the impact of money printing. Does the recent drop in gold prices indicate that the rate of money printing or government indebtedness is slowing down? Let s review some recent headlines. 1. World Central Banks Invested in a LOT of Gold in The World Gold Council (WGC) reported that in 2012, central banks purchased 535 tons of gold. Only a few years ago central banks were net sellers of gold. This was the highest level of gold purchases reported in over 50 years.

4 Page 4 2. And, World Central Banks Continue to Invest in Gold in The Bank of Japan Announces they are planning to DOUBLE their Money Supply by The Federal Reserve Plans to Continue Unlimited QE (Money Printing) William C. Dudley, president of the Federal Reserve Bank of New York, and Charles Evans, president of the Chicago Fed, said yesterday in separate remarks there s a need to continue the central bank s $85 billion in monthly bond purchases.

5 Page 5 As does Europe; European Central Bank President Mario Draghi said April 4 the bank stands ready to cut interest rates if the economy deteriorates further. And the UK; At the Bank of England, Mark Carney, currently head of the Bank of Canada, will become governor in July having said central banks should pursue escape velocity for their economies. ( Although recent world events seem to confirm our reasons for owning PM s, the recent drop in the price of gold has been disheartening. Let s review and remind ourselves of time tested and bedrock investment principles that apply today (and always) and help guide us towards long term investment success.

6 Page 6 Diversification is Vital A well designed portfolio should be widely diversified across asset classes and PM s and other inflation friendly sectors are a great example of this. History has told us over and over again that PM s do well in environments where the dollar (or other paper currency) is struggling, but there is certainly no guarantee that PM s will do well in the future or if it does to happen right away. A wise investor has a well thought out and broadly diversified plan that might be best suited to try and meet his or her own financial goals and address current economic conditions. Just Because an Event is Inevitable does not mean that it is Imminent The Fed s rampant money printing spree since 2009 seems to signal impending disaster and future inflation But even if a currency crisis and/or inflation is indeed inevitable it might be months or even years before we see any negative repercussions. And we all fervently hope that the Fed is smart and lucky enough to be able to somehow avoid a full blown financial crisis. There are some very smart folks running the Federal Reserve but they are walking through uncharted territory and conducting a grand financial experiment unlike anything we have seen in our lifetimes. I wish them wisdom and skill as they lead our country through treacherous times. Again, a diversified portfolio should address the concerns of the current economy.

7 Page 7 Markets can Stay Irrational for a Looong Time Longer than an Investor s Patience and Endurance The PM market might get worse from here During the decade of , gold soared over 2000% during a time of high inflation. In hindsight, it was crystal clear that PM s and other inflation friendly investments like energy and commodities would be an important and rewarding part of a portfolio during the 1970 s. But in the middle of gold s ten year moon shot IT DROPPED OVER 50%, sorely testing the pain threshold and patience of gold investors back then. The same phenomenon could happen again. On a personal note, I am shoulder to shoulder with all of our clients, and have significant allocation of our family s retirement accounts in PM investments also, for the very same diversification reasons and rational outlined above. I am also NOT a raving fan of PM investments. The sector is volatile and tries our patience and endurance as investors. I have often remarked that I can t wait for the day that we can reduce or eliminate our allocation to this sector perhaps when the governments of the world come to their senses and stop printing so much money.

8 Page 8 However in the meantime, a climate of skyrocketing debt and out of control money printing demands that a wise investor try to diversify away some of that risk. History tells us that PM s have been an effective asset for that purpose in the past. So what to do after last week s price disappointment? First let s check and review the philosophy and our conviction for being diversified into PM s and other inflation friendly investments as outlined above. Remember that it is only a relatively small part of our portfolios. We are generally recommending an 8-15% range to investments like PM s, energy and commodities. So far this year, other and larger parts of our portfolio, for example dividend paying stocks, are doing very well. If you are still OK and can stick with the philosophy and thesis of diversifying into PM s to try and hedge against rampant money printing then do nothing. One of the most successful Wall Street investors of all time famously said, Be Right and then Sit Tight. If you are still concerned or unsure, let s review this, perhaps with an option to reduce your weighting to this area if you feel it is necessary for your comfort. We can be available to discuss this at our next review meeting, or of course please do not hesitate to call us. We remain completely committed to your well-being and success. Warm Regards, William R. Gevers Financial Advisor PS: We have been repeatedly asked by clients if they could share these notes with their friends or neighbors. Please feel free to forward this with the stipulation that it may only be forwarded if done so in its entirety with no portions omitted. We would be delighted to share our comments and opinions with your friends, and welcome your comments and feedback. If you received this and would like to be included on our newsletter list, please us at wgevers@geverswealth.com PPS: We just upgraded our database and have a wonderful new cloud based system hosted by Microsoft Dynamics. This is the first client newsletter using our new program. We have been scrubbing and verifying our data, but our IT folks tell us that it might send out some duplicate e- mails initially. I apologize ahead of time if that does happen, and appreciate your patience and letting

9 Page 9 us know if that does happen to you. If you have received this newsletter in error, or do not wish to be on our mailing list, please reply to this with unsubscribe in the subject line. If this is the case, we apologize for the inconvenience. Copyright 2013 William R. Gevers. All rights reserved. I-90 LakePlace Center 1605 NW Sammamish Road, Suite 250 Issaquah, WA Office: Fax: wgevers@geverswealth.com The views are those of William Gevers,, and should not be construed as individual investment advice. All information is believed to be from reliable sources; however, no representation is made as to its completeness or accuracy. All economic and performance information is historical and not indicative of future results. Investors can not invest directly in an index. Please consult your financial advisor for more information. Securities and advisory services offered through Financial Network Investment Corporation, Member SIPC. Gevers Wealth Management and Financial Network are not affiliated.

10 Page 10 US Money Supply, US Dollar, and Inflation/Deflation Watch US Money Supply Adjusted Monetary Base (

11 Page 11 US Dollar Price (DXY) USD Index Measured against Other Currencies ( 00&ed=&size=M&log=0&t=LINE&v=1&g=1&evnt=1&late=1&o1=&o2=&o3=&sh=100&indicators=&ad dindicator=&submitted=1&fpage=&txtdate=#jump)

12 Page 12 Inflation/Deflation -Year to Date Price Increase in Commodities and Basics as Measured by Futures (

13 Page 13 Velocity is a measure of how quickly money is spent. High velocity is typically a precondition for inflation. (