January 6, 2012

Gold at $10,000? Bullion Buff Barisheff Makes the Case

As long as government indebtedness fuels currency devaluation, Barisheff says, investors will have to buy gold

Gold traders on the floor of the NYMEX. (Photo: AP) Gold traders on the floor of the NYMEX. (Photo: AP)

Gold bug Nick Barisheff has been touting the yellow metal for a very long time. His company Bullion Management Group sells bars of gold and precious metal bullion funds. And this year the Toronto-based investment company CEO will publish a book called $10,000 Gold.

That’s an intriguing title for a commodity currently trading at $1,617 an ounce, and one which immediately recalls the flopped Dow 36,000 book that came out in 1999 just before the dot-com bubble burst, having reached a peak of 11,750 in January of 2000.

But in a speech at the Empire Club of Canada on Thursday, Barisheff offered a spirited defense of gold’s inevitable rise, arguing that increasing governmental indebtedness and currency debasement make today’s gold price insignificant.

Barisheff told Empire Club audience that the same factors that have made gold the top performing asset class since 2002 ensure continued gains. In other words, this is “not a typical bull market” that will run its course as investors rotate into another favored sector but a rational response to depreciating currencies driven by debt-spiraling Western governments.

As he put it, “gold is not rising in value, currencies are losing purchasing power against gold, and therefore gold can rise as high as currencies can fall. Since currencies are falling because of increasing debt, gold can rise as high as government debt can grow.”

Barisheff explains that investors view gold not as a commodity but as a currency, noting the $37 billion per day turnover of the London Bullion Market Association–a trade volume far in excess of jewelry demand. As governments lose control of their finances and incur indebtedness funded through currency devaluation, investors–including central banks–respond through gold purchases as a means of counterbalancing their currency losses.

In the case of the U.S., the federal debt and the price of gold have thus moved in “lockstep,” Barisheff says, and he projects this correlation to continue as long as U.S. debt remains on an upward trajectory. He says U.S. debt is expected to reach $23 trillion (from its current $15 trillion level) in 2015. If the current relationship between public debt and gold holds, that implies a gold price of $2,600 per ounce. “However, if history is any example, it’s a safe bet that government expenditure estimates will be greatly exceeded, and the gold price will therefore be much higher,” he said.

Indeed, he notes a Congressional Budget Office forecast that U.S. public debt will reach an unsustainable 101% of GDP by 2021, and says that official current debt–“if the U.S. government used the same accrual accounting principles that public companies must use” and thus include unfunded liabilities like Social Security and Medicare–should actually exceed $120 trillion. At more than $1 million per taxpayer, “this amount is impossible to repay,” he said.

Frightening as this scenario is, Barisheff sees increasing debt as the most likely course since the other options are all economically or politically unrealistic at this time. Recession-poised economies are not likely to see sustained economic growth; austerity measures will in the short-term reduce GDP and are politically unpopular; and debt default would make it impossible for cash-strapped governments to raise needed funds in the capital markets.

This leaves further debt issuance and currency creation as the most realistic option. And that, Barisheff argues, implies that the U.S. dollar and other currencies will continue to lose purchasing power to gold.

Barisheff says the U.S. dollar and British pound have lost over 80 percent of their purchasing power against gold in the past decade. Going forward, he foresees significant gold purchases on the part of pension funds and insurance funds as a means of diversifying out of financial assets such as stocks and bonds.

The bullion-selling investment company CEO recommends physical gold ownership as opposed to mining shares, ETFs or other proxy forms of ownership. While he could not be reached by AdvisorOne to explain this preference, commenting to his Empire Club audience he rhetorically asked: “In the case of fire, would you rather have a real fire extinguisher or a picture of one?”

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