But, the potential for an upside price explosion seems to me more than offsetting, especially given the real need to hedge
against runaway inflation because the Executive Branch, the Fed Chairman and the ECB seem dedicated to "stimulus" at almost
any cost. The key to gold's upside is that it is virtually absent from institutional portfolios. John Hathaway of Tocqueville Funds
has often said that if all investors suddenly wanted to own a 1% position in gold bullion, "It's a trade than cannot happen!"

Shayne McGuire is head of research for the giant Teachers Retirement System of Texas. In his wide-ranging new book, "Hard
Money", he makes the point that a typical pension fund has an almost negligible 0.15% position in gold. Gold is not regarded as a major investable asset class on Wall Street today.

The global investment assets of pension funds ($24 trillion), insurance companies ($19 trillion) and mutual funds ($19 trillion) total $62 trillion. To invest 1% of that in gold would mean new demand equal to half the current value of investable gold in the world! If $620 billion of new demand tried to squeeze into a $1,300 billion asset, even without considering the inevitable emotional enthusiasm of traders, it's easy to picture at the very least a 50% price increase to the $2,250 oz. area. Probably more. Possibly a lot more.

A 50% gain would be pleasant, of course, but compared with a downside risk of 40% it's little more than a 50-50 proposition. We value investors are not so easily persuaded. We own gold because the upside potential seems much greater in the (likely) situation where central banks stubbornly cling to their illusion that imaginary money will kick-start the kind of real economic growth we were used to in less-leveraged times.

Rather, we think, the developed world is nearing a very dangerous inflexion point, and this is the environment in which we must invest. Lined up behind the central bank banners of Euroland, the United States, Japan and the UK, we 1.2 billion citizens are a parade of Wiley Coyotes marching mindlessly toward the monetary precipice. If the march is somehow turned back from the edge, we'll be as happy as the next guy. But as unwilling yet rational subjects of the realm, at least we can pack our golden parachute.

As more investors actually do choose gold as their "insurance policy", how high could the price go? It really depends on how
fast the consensus evolves from, "Problem? What problem?" to "Oh, NO!" A chapter in McGuire's book is titled, "How $10k gold is possible". Essentially, the answer is that much of the small total value of all investment gold in the world is made even smaller by the large percentage that is privately owned as a core holding and is not for sale. It seems that this is becoming a larger part of gold's reality. For example, the Teachers Retirement System of Texas recently took physical delivery of $1 billion of gold bullion; you don't lease vault space and take delivery of something you bought for a trade! That bullion is off the market.

For small investors, mutual funds and pension funds, investing in gold used to mean buying gold mining stocks, which have operating risks and often do not respond to rising bullion prices. The creation of gold ETFs in 2003 opened up direct gold investment to the public. Roughly $70 billion of bullion is currently owned in ETF form, but this is a 0.05% drop in the ocean of financial assets. It is less than the market cap of Walt Disney!

Literally thousands of investment funds now have access via ETFs to a new, differentiated asset class from which they were heretofore literally excluded. If and when any kind of consensus begins to develop around the idea that gold is a legitimate asset class, there is the potential for the price to, as they say, "go parabolic".

Think about it. In 1980, central banks held about 60% of their reserves in gold bullion; now, after a couple decades of selling,
gold is down to only 10% of CB reserves. That's not an awful lot of baseline assurance at a time when the authorities are printing money with the express intent of creating price inflation! Even if gold's price doubles, gold as a percent of central bank reserves would still be only 1/3 of what it was when Paul Volker was at the helm!

Could gold reach $3,000 oz.? $5,000? $10,000? Again, we cannot know, but if even 1% of the publicly-traded investment
assets in the world should become earmarked for gold bullion, that would represent new demand in excess of $1.4 trillion. That's an awfully large number compared with the $70 billion currently parked in gold ETFs, the easiest way for investment companies to own gold. And it's twice the current value of all the investment gold in the world that might be for sale (assuming about half is long-term, private core holdings.)

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