Do you want to see gold in the big picture? Read an interesting interview with Marc Gugerli by Oliver Disler. Marc Gugerli is
Fund Manager & Advisor of Gold 2000 Ltd and the Julius Baer Gold Equity Fund.

Oliver Disler: Mr. Gugerli you are a specialist for Gold and Gold mining stocks. Are you disappointed about the performance of the Gold price the recent months?

Marc Gugerli: No, I am not. Gold has outperformed all major asset classes like bonds and shares. The Gold price calculated in South African Rand, Australian and Canadian Dollar, British Pound, EURO, Swiss Franc and some other currencies Gold just recently reached new highs. Rather disappointing is the performance of gold mining shares.

Oliver Disler: We are facing one of the heaviest global financial crisis, why is Gold not trading much higher?

Marc Gugerli: Gold has primarily a function of conserving the value of purchasing power. Gold is money and goes hand in hand with the development of money supply long-term. In recent months a lot of money has been destroyed, although on opposite central banks are printing money.

The various problems and issues we have in financial markets, have been recognized much too late and most central banks (especially the ECB) are “behind the curve” reacting with adequate counter-measures. This is one of the reasons, why the gold price did not go up explosively.

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Oliver Disler: What is the relation between the gold price and the supply of money precisely?

Marc Gugerli: Yes. Gold was, is and remains money. Gold supply and demand and the variation of paper money supply are two important parameters which have an impact on the price of gold. Before the financial crisis started in 2007, money supply was growing at a rate of roughly 10 % in most industrialized western countries. Nowadays it is a multiple of ten percent.

A lot of central banks try to get ahead of the curve by reducing interest rates and flooding the markets with new money. The gold price should reflect this already now and trade around its inflation adjusted top of approximately USD 2’000. Man wants to go against the curve.

This is my minimum target for the gold price! The inflation of gold (dilution) is about 1.6% (gold output) or 2’000 tons per year. The entire amount of gold ever mined in mankind history is estimated to be about 140’000 tons. Money supply growth is approximately 30% and exceeds even 100% in some specific cases. It is just a matter of time that Gold will rebalance this inequality.

Oliver Disler: Is Gold an alternative to treasury bonds, since the yields are so low?

Marc Gugerli: That is a great question. Treasury bills are the next big bubble (to burst). Investors and most asset managers have in average 20% cash and 30% invested in short-term treasuries. For a certain period this might be the right asset allocation.

Since the yields on cash and short-term treasuries are almost 0% in major currencies, Gold is getting more attractive as an investment. Now you have to ask yourself, if you rather want to be fully invested in classical assets only where the supply is exploding by the new money printed or at least add some Gold which can’t be copied, printed and is nobody’s liability?

Oliver Disler: How shall somebody invest into Gold? Do you suggest Gold coins as well?

Marc Gugerli: There are three possibilities, which are relatively safe:
1. You buy physical Gold and put it into a vault

2. You could buy the Gold ETF from Zurich Kantonalbank (ZKB) which is traded at the Swiss Stock Exchange, which is the only ETF available which is fully covered by physical Gold and if needed you can exercise and get the Gold delivered within 10 days. There are similar products available but as with bank metal depository accounts you run the risk that you have to wait a long time until you get your gold. Very important: Reduce to a maximum the failure of exercise, counterparty and depository risk.

3. It makes absolutely sense to purchase gold coins in respect of the designated use. Investors have to consider that gold coins trade at elevated premiums and are almost not available anymore in some regions, such as United States of America, Canada or Australian.

I suggest to have invested minimum 10% of total wealth in physical Gold. Consider this investment as an insurance which in worst case scenario protects the rest of your holdings and assets.

Oliver Disler: This is interesting, but again, why is the price of Gold not trading much higher?

Marc Gugerli: The majority of investors purchase Paper-(Gold)-Futures at the COMEX. The sellers or counterparties of those Gold-Futures are just a few very dominant players. Some of them have an in-official close link to the US government. So far most of the investors didn’t exercise the gold futures and have accepted cash instead of physical settlement.

This is about to change. I believe that the comex will default and the entire paper gold market will „crash“ and gold could rise very quickly to 2000 until 3000 US Dollars. When this happens it will be too late to exercise or to try purchasing physical gold. It’s the same with a house insurance, which you need before the beds are burning!

Oliver Disler: What is your view about the price of Silver?

Marc Gugerli: The situation in the paper silver market is even worse. At the actual levels, Silver is extremely cheap and investors are divided if Silver is rather an industrial or still a precious metal or both. But having a look at the price development it is rather treated like other industrial metals as well. Silver is the Gold of the poor Man.

I believe that the price of Gold becomes extremely expensive and will be considered rather as “store of wealth” than money. What concerns Silver I can imagine that for example China or Mexico could accept Silver to be money and mean of payment (Silver Standard). I expect that Silver could outperform the price of Gold. Silver takes much more space to store and in most countries you have to pay VAT on Silver purchases. I suggest the Silver ETF of ZKB, which can be traded at the Swiss Stock Exchange.  Continued...