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Bullion as an Investment, Part 3

Editor's note: This is part 3 of a three-part series on Bullion as an Investment. Part 1 was published Friday, and part 2 was published Saturday.

The Superior Choice

In the first two parts of this commentary, I demonstrated to readers that supply to the gold market is essentially flat, and drew attention to the strange, flip-flop of central bankers who were dumping vast amounts of bullion -- at the lowest prices in history -- and are now buying large amounts of bullion (at the highest, nominal prices in history).

What has caused central banks to violate the golden rule of investing ("buy low, sell high")? Simple. These are the same officials who are destroying our (paper) currencies with their money-printing -- and thus they know (better than anyone else on the planet) that gold will continue to rapidly appreciate vs. their own diluted paper.

The tidal wave of inflation which is being unleashed is only just beginning to be felt by the average person. Indeed, Wal-Mart (WMT) just reported a 6% month-over-month change in store prices. This translates to an annual inflation rate of 72%, and represents the largest month-over-month price increases in Wal-Mart history.

What this means is that we have every reason to believe that individual gold holders will undergo the same born-again transformation to gold bugs which we have seen with central banks. Thus, we could easily see scrap sales suddenly collapse.

Tempering this trend, however, is the economic reality that ordinary individuals have had their standards of living destroyed by the greed and incompetence of bankers. Because of this, many ordinary citizens may be forced to liquidate some of their bullion -- to simply survive. Indeed, we (as precious metals commentators) would be charlatans, ourselves, if we told people that they needed precious metals "insurance" -- and then predicted that they would never use it.

It is impossible to precisely quantify these variables, but certainly not unreasonable to treat this as a neutral factor: that while extreme volatility will continue to exist in scrap-sales, the overall trend will be flat. After all this analysis, we ultimately reach a simple position: on the supply side, we should expect neither "acceleration" or "deceleration" in the supply of gold.

This means we can answer our initial question (will bullion appreciate in absolute terms?) by focusing totally on the "demand" side: the acceleration (or deceleration) in global incomes. This analysis will be much simpler (and shorter) as it can be laid out very clearly.

The statistic which I will focus upon is GNI (or "Gross National Income") per capita. Global per capita GNI:

2001: $5120 (USD)
2005: $6987
2009: $8751

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