BMG Special Report - Gold Myths

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BMG SPECIAL REPORT The Six Biggest Myths About Gold 2010 Update 1

Table of Contents

INTRODUCTION 2MYTH 1: GOLD IS A BAD INVESTMENT 3MYTH 2: GOLD IS NOT A GOOD INFLATION HEDGE 6MYTH 3: GOLD IS A RISKY INVESTMENT 7MYTH 4: GOLD DOES NOT PAY INTEREST OR DIVIDENDS 16MYTH 5: GOLD IS AN ARCHAIC RELIC 19MYTH 6: MINING STOCKS ARE A BETTER INVESTMENTTHAN BULLION 19SUMMARY 21

This report is available for download at www.goldmyths.com. For a printed

copy please contact Bullion Management Group Inc. www.bmgbullion.com

For the BMG Special Report: How to Invest in Precious Metals" Visit:

www.preciousmetalsinvestinginfo.com

Bullion Management Group Inc.

Bullion Management Group Inc. (BMG), one of the world's fast-growing precious metals bullion investment companies, offers

investors a cost-effective and convenient means of purchasing and

storing physical gold, silver and platinum bullion for real wealth

preservation and portfolio diversification.


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2 The Six Biggest Myths About Gold BMG SPECIAL REPORT 2010 Update

The Six Biggest Myths About GoldBy Nick Barisheff, President and CEO, Bullion Management Group Inc.

f the seven asset classes cash, stocks, bonds, real estate,

commodities, precious metals and collectibles none are subjectto such widespread negative bias and misconceptions as preciousmetals, particularly gold. It is amusing that gold is used to denoteonly the highest quality or greatest achievement, as in gold creditcards and gold Olympic medals, yet as an investment it is perceivedto be highly speculative, risky, volatile and worst of all it doesntgenerate any interest or dividends. These myths remain prevalenttoday, even though gold has had a track record of preserving wealthfor over 3,000 years. Over those years, the currencies of countlesscountries have lost purchasing power or have become completelyworthless. Although it is often thought of as an archaic relic in themodern world of digital currencies, gold continues to preserve its

value for astute investors across the globe.

If you examine the facts with an open mind, the commonly heldbeliefs and myths discussed here simply do not stand up to scrutiny.But their very existence makes an investment in precious metals evenmore attractive. Why? Because gaining an accurate understanding ofkey information before it becomes common knowledge allows aninvestor to buy at an effectively discounted price. Once the public

becomes educated about gold and the myths are thoroughlydispelled, you can be certain that the investment will be fully priced.Fortunately for bullion investors, that is not the case today.

Lets examine the six biggest myths about gold in detail.

O

3rd Edition

May 2010


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MYTH 1: GOLD IS A BAD INVESTMENT

Everyone seems to have a story about how someone they know bought gold

at *$850 per ounce in 1980 and had to wait 28 years to break even. If inflation

is taken into account, the gold price would need to reach $2,200 for that to

occur. While this may have happened to the few unfortunate people who

bought at the top of a short-term spike, it also applies to most investments. Ifyou buy any investment at a cyclical peak, you will have to wait a long time

to break even. The 1929 peak of the Dow Jones Industrial Average was not

surpassed until 1953 (24 years later), the 1968 peak of the Dow was not

surpassed until 1982 (14 years later), the Japanese NIKKEI is still down 75

percent from its peak of 44,000 in 1989, nearly 20 years later, and the

NASDAQ is still down 56 percent from its peak of 5,500 in 2000, even after a

number of its stocks, which had become completely worthless, were

replaced.

Closer examination (see Figure 1) shows that gold only surpassed $800 per

ounce on two days in 1980. And the peak monthly average high was

considerably lower, at $675 in January 1980. Its hard to imagine that many

people actually bought gold on the one day that it was $850 in 1980. The

average annual high was $613 in 1980. One year earlier, in 1979, the average

price was $306 and in 1978 it was $193. For the many investors who bought

gold ahead of the short-term peak, the price held up fairly well throughout

the entire bear market.

It took 24 years forthe Dow to recoverits 1929 peak.


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Had investors simply avoided the mania phase and invested two years

earlier, they wouldnt have experienced any losses. Had they invested when

President Nixon cut the link between gold and the US dollar on August 15,

1971 (Figure 2) they would have purchased gold at $40 per ounce and

enjoyed a 42 percent per year compounded rate of return after inflation

well surpassing the Dows performance.

Another argument often cited to support the thesis that gold is a bad

investment references studies that compare gold to equities using very long

time periods dating back to the 1700s. The studies conveniently ignore the

fact that gold was money throughout the majority of that time, and in fact

the price was fixed by the government until 1971. They erroneously compare

gold money held in a vault to an investment in stocks. Stocks cannot be

compared to gold when it comes to risk. Virtually all of the stocks that

existed in 1700 no longer exist today, so at some point investors and their

descendants would have lost their entire investment.

Gold hasoutperformedinflation since1971. Not so theDow.


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Of the 30 stocks that made up the Dow in 1929, only General Electric and

Exxon Mobil still form part of the Dow today. Of the stocks that made up the

Dow in 2000, only 23 are still Dow components today. Honeywell, Citigroup,

Kodak, SBC Communications, GM, International Paper Company, and Philip

Morris have all been removed from the Index. If investors buy stock and that

stock declines to zero, they lose their investment. They cant simply replace itwith another stock and ignore the loss (which is what the indexes do).

During the current cycle, precious metals have performed exceptionally well,

outperforming all but two of the companies in the Dow 30. Figure 3 shows

the comparative performance of the Dow 30 stocks vs. gold since 2000.

While gold posted a compounded return of 14.1 percent, 22 Dow

components have posted losses.

Of the 30 stocksthat made up theDow in 1929, onlythree still form partof the Dow today.


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MYTH 2: GOLD IS NOT A GOOD INFLATION HEDGE

There are a number of arguments against gold as an inflation hedge. Usually

these arguments select their time frame from the price spike in 1980. While

gold did not keep up to inflation using daily prices from 1980 to 2002, the

annual average gold price has outperformed inflation as measured by the

Consumer Price Index (CPI) since 1971, when the gold price was no longerfixed (Figure 4).

If you consider the period from the abandonment of the gold standard in

1971 to date, gold has performed exceptionally well in terms of purchasing

power (Figure 5). In 1971, an average car cost 66 ounces of gold; an average

house cost 703 ounces of gold; and the Dow cost 25 ounces of gold. Today, 66

ounces of gold would buy nearly four cars, 703 ounces of gold would buy

two houses and only 10 ounces of gold would buy the Dow.

Gold has increasedits purchasingpower since 1971.


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It might be more relevant to ask: Does gold retains its purchasing power

through both inflationary and deflationary periods? In 1977, an extensive

study by Roy Jastram was published as a book entitled Golden Constant.

His work thoroughly analysed the purchasing power of gold in England and

the US from 1560 to 1976, and his research indicated that gold holds its value

remarkably well over time. Gold prices do not chase after commodities, butrather commodity prices return to the index level of gold over and over

again.

As we move forward and central banks worldwide continue to accelerate the

pace at which money is printed, inflation will increase, and the confidence in

fiat (printed) currencies will decline. This will result in more and more

people fleeing to the safety of gold, and will see its price rising far in excess

of inflation.

MYTH 3: GOLD IS A RISKY INVESTMENT

In order to adequately analyse risk we need to understand what risk means.As Warren Buffett has aptly stated, Risk comes from not knowing what you

are doing.Although every investment comes with a risk/reward trade-off,

few investors focus on or understand the risk element.

TYPES OF RISK

There are numerous types of risk that may apply to some investments and

not others.

Liquidity RiskLiquidity risk is associated with the market on which the investment trades.

An investment that can be sold quickly without price concession is

considered liquid. Small unlisted stocks, privately held mortgages and realestate are somewhat illiquid and can be difficult to sell without incurring

significant discounts and costs. Even publicly listed stocks in a broad market

decline can become illiquid, with smaller public companies being vulnerable

to no-bid situations. This was evident in 1987 when many mining stocks had

no bids. Gold and silver bullion are traded by members of the London

Bullion Marketing Association 24 hours per day in New York, London,

Zurich, Hong Kong, Tokyo and Sydney. The average daily turnover was

over $18 billion in April 2010. The turnover is the net difference in trades

between the members, while the trading volume is estimated at 7 to 10 times

that amount. Platinum trades in Zurich but no volume or turnover data is

available. As such, the liquidity risk of precious metals is very low, and atleast comparable if not better than traditional publicly traded stocks and

bonds.

Financial assetsoften contain

multiple risks liquidity, currency,default, interestrate and marketrisk. None of theserisks apply to gold.


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International RiskInternational risk can include both political risk and currency risk. Political

risk includes issues such as nationalization or confiscation of assets, punitive

tariffs or taxation and punitive regulatory issues. Gold bullion may be

subject to these issues if stored in politically unstable countries, but since

bullion is portable, global investors will seek to store it in stable countries

such as Canada and Switzerland. However, real estate, corporate assets,

foreign bonds and equities and mining concessions are not moveable and

therefore subject to these risks.

Currency risk must also be taken into account when investing. While the

Dow has experienced new highs since 2000 in US dollars, it has not achieved

any gains in strong currencies such as the Canadian dollar or the euro.

Depending on the domicile of the investor, value changes in the local

currency will vary. However, since most countries are expanding their

money supplies by double-digit amounts, the currencies tend to fall against

gold (Figure 6). The most extreme example of this is Zimbabwe, where in July2008 inflation was measured at more than 231 million percent. By December

2008 the official inflation rate was estimated at 6.5 quindecillion

novemdecillion percent, or 65 followed by 107 zeros percent.

Investors can avoidinternational risk asgold is portable.


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Default Risk and Credit Rating Risk

Default risk and credit rating risk are associated with debt instruments.

Clearly, when a bond or a mortgage defaults, the investor will suffer losses.

The investor may also suffer losses if a debt instruments credit rating is

downgraded. This results in a reduction in price of the bond to generate a

higher yield in order to compensate investors for the higher level of risk.

Since physical unencumbered bullion is not anyone else s liability, it is not

subject to these risks. However, some derivative forms of bullion such as

unallocated certificates, pooled accounts and futures contracts and options

can be subject to these risks.

Interest Rate RiskInterest rate risk affects most asset classes. While changes in interest rates

have a direct impact on debt instruments, they also have an indirect impact

on stocks, real estate, commodities and precious metals. Rising interest rates

correspond to attempts by central banks to fight inflation or to slow down an

overheated economy. Initially, precious metals, commodities and real estate

tend to increase in value due to inflation. However, if real returns become

sufficiently high, demand for gold may decline while demand for bonds

increases. During a period of low interest rates, it is better to hold bullion, as

bond returns become negative after accounting for inflation. Due to the high

amount of debt at all levels in the US and most other western countries, the

central banks ability to raise rates without risking a massive collapse of the

economy is limited.

Purchasing Power Risk

Purchasing power risk is essentially inflation risk. It impacts all asset classes,

which is why returns and investment performance should always be

measured in real terms rather than just nominal terms. In 2007, the best-

performing stock market in nominal terms was that of Zimbabwe, withreturns of 18,000 percent. The importance of factoring in inflation becomes

apparent when you consider that Zimbabwes inflation rate was over 68,000

percent. During high inflation periods, financial assets such as stocks and

bonds tend to underperform, while tangible assets such as real estate,

commodities and precious metals tend to outperform financial assets and

inflation. While precious metals are considered by most investors to be a

good inflation hedge, few people realize that the purchasing power of

precious metals actually increases during deflationary periods. That is

because virtually all other assets decline in price by a much greater amount

than precious metals.

Gold bullion is notsomeone elsesliability.

Gold maintains itspurchasing powerduring inflation anddeflation.


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10 The Six Biggest Myths About Gold BMG SPECIAL REPORT2010 Update

Market RiskMarket risk i s exposure to uctuation s in the aggregate market. Th ese can be

inuenced by su pply/demand issues, investor sentiment, structural changes

in the economy and changes in tax laws. All asset classes are subject to

mar ket risk in varying degrees. Proper diversication using at least six asset

classes with varying degrees of correlation can minimize overall market risk.

As stocks and bonds have been correlated since 1969, portfolios consisting of

only three nancial asset classes are subject to much higher market risk tha n

a portfolio that includes other asset classes such as real estate, commodities

and precious metals. The proper balance of all asset classes will not only

reduce risk but improve returns.

Market risk can bereduced through fulldiversification usingall six asset classes.

The traditional

investment pyramid

(Figure 7A) places

precious metals in thehigh-risk group, at the

top. But the pyramid

fails to distinguish

actual physical bullion

which is a low-risk

investment from

precious metals stocks,

options and futures

which are high risk

Figure 7B

demonstrates the

precious metals

pyramid. It details the

varying degrees of risk

associated with

dierent types of

precious metals

investments. Physical

bullion is at the bottom

of this pyramid

because it is the lowest

risk and highest

liquidity.


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Systemic Risk

Systemic risk encompasses several factors such as market risk, economic risk,

inflation risk, default and international risk. Systemic risk can also include

terrorist attacks, war, oil supply disruptions, a major stock market crash, the

collapse of a major financial institution or a breakdown of the banking

system. Systemic risk is not diversifiable and will affect all asset classes

including precious metals. However, once any initial liquidation takes place,

precious metals tend to outperform all other asset classes as investors seek

refuge in the traditional safe haven of bullion. During these times precious

metals tend to become the only form of currency that has any value or

liquidity.Loss of Capital RiskTo most people, loss of capital risk means losing a part of the investment,

dealing with a volatile investment and having to sell at an inopportune time,

or having the investment not deliver the expected returns. Stocks and bonds

are financial assets that can and often do become worthless. You only have

to consider the once-blue-chip stocks such as Enron, Worldcom, Air Canada

and Nortel to appreciate the real risk of the potential loss of capital in stocks.

In 2008 we saw the worlds largest bank, Citibank, lose 60 percent of its value

in six months, yet gold is perceived as risky. Real estate can suffer uninsured

losses, mortgage foreclosure or environmental factors that can make it almost

worthless. Some commodities can deteriorate over time and lose value.

Mining company shares, futures contracts, options, pooled accounts and

certificates and other gold derivatives can all become worthless. Only

precious metals bullion cannot default, cannot deteriorate and cannot decline

to zero. During times of economic stress, banking crisis or currency crisis,

financial assets and real estate can become totally illiquid while bullion will

actually increase in value and maintain its liquidity. As a result of these

attributes, bullion is the least risky asset class with respect to loss of capital.

Underperformance RiskIt is true that precious metals did not deliver expected returns during the 20-

year period from 1980 to 1999. However, this was attributable to a number of

market distortions that are not likely to be repeated.

Due to the constant increase of global money supply by central banks, one of

the longest and highest bull markets in stock market history began in 1980

and continued until its collapse in 2001. Over that time, investor demand

shifted almost entirely to financial assets (stocks and bonds). In addition, oil

and other commodities were priced in US dollars, which increased global

demand for dollars. The US dollar benefited from the collapses of currenciesin Brazil, Japan, Argentina, Mexico, Russia and South East Asia,

strengthening the dollar against all other currencies as well as gold.

Some central banks reduced their gold holdings with a great deal of

publicity, while others quietly increased their reserves. Many central banks

Citibank lost 60percent of its valuein six months, yetgold is perceived asrisky.

Only precious

metals bullion

cannot default,

cannot deteriorate

and cannot decline

to zero.

Only bullionprovides protectionagainst systemicrisk.

The practice of

leasing gold and

mine hedging

contributed to price

weakness.


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leased their gold, which was sold into the marketplace and caused an

artificial supply. The estimates of total leased gold vary, but as much as half

the central bank holdings of 30,190 tonnes may have been leased out.

In the future, this leased gold will have to be repaid or massive defaults will

occur. The aboveground stockpile of one billion ounces of silver held by the

US Mint was sold into the market. The aboveground Strategic Reservestockpiles of silver and platinum were also sold into the market.

Mining companies sold production forward, further depressing prices, and

significant naked short positions were created on the Comex futures markets

that have yet to be unwound. As these naked short sellers do not have any

bullion to deliver, they may be forced to become buyers in a rising price

environment. While all of these were contributing factors to suppressing the

price of precious metals, none of these conditions are present today. Instead,

we have increasing demand for all three metals gold, silver and platinum -

for both their commodity and monetary attributes, while at the same time

available aboveground supplies have been depleted and mine supply is in

decline.

Figure 8 shows the result. Even with the corrections in 2006 and 2008

precious metals are still in an uptrend that began in March 2002,

outperforming all other asset classes.

M

MEASUREMENT OF RISK


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Standard DeviationStandard deviation is the most commonly used measure of risk. Standard

deviation calculates the total risk or variance associated with the expected

return. It simply measures how volatile or widely spread an investments (or

portfolios) returns are from its mean, over a period of time. If monthly or

yearly returns remain fairly close to the mean, then the standard deviation is

small; if returns are widely dispersed from the mean, then the standard

deviation is large.

Historical standard deviation or risk can be calculated for individual

securities using total returns for some specific period of time. Using this

methodology, Figure 9 shows the standard deviation plotted against returns

since 2000 for gold, silver and platinum, as well as a combination of all three.

It also shows the standard deviation and returns for the 30 individual Dow

stocks, as well as the index.

Comparing the volatility of gold (17 percent) to the entire Dow Jones index

(15 percent) is unfair, but when gold is compared to individual Dow Jones

components, its volatility is less but the performance is higher.

Precious metals place in the upper quadrant of low risk and high returns

while most of the Dow components fall into the lower right-hand quadrant

of low return, high risk.

Precious metals

provide high

returns at low risk.


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Sharpe RatioThe Sharpe Ratio (risk-adjusted rate of return) was developed by Professor

William Sharpe in 1966, and is the most commonly used measure of risk-

adjusted return. It measures the amount of excess return the investor is

receiving in exchange for the extra volatility assumed in holding a riskier

asset. It is broken down into three components: asset return, risk-free return

and standard deviation of return. After calculating the excess return, the

Sharpe Ratio is obtained by dividing that excess return by the assets

standard deviation. This ratio or risk-free rate of return is used to gauge

whether the investor is being properly compensated for the additional risk

incurred by investing in the risky asset. Traditionally, the risk-free rate of

return is the shortest-dated government Treasury bill.

The interpretation of the Sharpe Ratio is straightforward: the higher the

better. A high Sharpe Ratio means that the investment delivered a high

return for its level of risk or volatility, which is always good. As a result,

using the Sharpe Ratio provides a more meaningful insight to investment

performance than simply looking at returns or volatility separately. Figure 10

compares the Sharpe Ratios of gold, silver and platinum against the Dow

components. As you can see, all three metals are top performers.

Precious metalshave higher Sharperatios than mostDow components.


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Sortino RatioWhile the Sharpe Ratio is the most famous risk/return measure, others have

been developed. The Sortino Ratio is similar to the Sharpe Ratio, but its

denominator focuses solely on downside volatility, not overall volatility. Since

most investors are only concerned with downside risk, it is a more

meaningful measure in practical terms.

Figure 11 compares the Sortino Ratio for gold, silver and platinum against the

Dow components. When the two tables are compared, you can see that gold,

silver and platinum are even more attractive, since a great deal of the

volatility has been on the upside, while the Dow components have primarily

experienced downside volatility.

Precious metalshave higherSortino ratios thanmost Dowcomponents.


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MYTH 4: GOLD DOES NOT PAY INTEREST OR DIVIDENDS

This reasoning has often been used to denigrate the benefits of holding

bullion. In fact, the Bank of England cited this argument as justification for

selling half the countrys gold holdings at the bottom of the market in 1998.

They wanted to make a safe investment in US Treasury bills that would

generate interest (Figure 12). They sold their gold at under $300 per ounce,and then the price of gold tripled while the value of the US dollar lost 30

percent against the British pound. Combine the currency exchange losses

with the lost opportunity cost and the result is several billion in unnecessary

losses that offset any interest income they might have received. The same

goes for bond investors in an inflationary environment. Their real or

inflation-adjusted interest rate is negative.

Gold, like currency or any other asset that sits in a vault, will not earn

interest or dividends. But equally, it will not be at risk. No asset class

generates income unless you give up possession of your money and take the

risk of not getting it back. As we have recently seen in the US and the UK,

bank deposits are not as safe as commonly believed. Many people think that

money deposited in a bank account is held in trust for them. In fact the

money deposited into a bank is legally a loan that the bank lends out in order

to make a profit. The money is simply not there, so if there are rumours that

a bank is becoming insolvent, depositors can panic and create a run. They

know they could lose part of their savings. Likewise, when investors

purchase stocks or bonds, they run the risk of losing their capital.

No asset classgenerates incomeunless you give

possession of yourmoney and takethe risk of notgetting it back.


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Not so with gold held in a vault on a fully allocated, segregated basis.

Although holders of gold can earn lease interest by lending their gold, many

gold investors dont believe its worthwhile to run the risk of not getting

their gold back in order to earn interest. Bond and equity investors should

also carefully consider whether the risk/reward relationship of losing

principal relative to the interest paid is acceptable in todays uncertain

environment.

Investors who need current cash flow during this high inflation period can

liquidate part of their gains in precious metals to generate income. For

example, instead of holding bonds at 4 percent when real inflation is 8

percent, resulting in a real capital loss of 4 percent each year, investors could

liquidate one-half of a gold gain of 10 percent and still have their capital

grow by 5 percent. On an after-tax basis the gold gain would be taxed at a

favourable capital gain rate instead of interest income. In this way the

investors capital grows in real terms and they have more after -tax dollars to

spend.

Figure 13 (page 18) provides a detailed comparison of holding bonds vs. a

systematic withdrawal of BMG BullionFund.

The inflation rate used is the more realistic inflation rate of 8 percent using

the original formula for the calculation of the CPI as calculated by John

Williams www.shadowstats.com/charts_republish#cpi. In making

investment decisions it is critical to accurately determine the true inflation

rate. Misaligning the investment portfolio with real inflation can have

devastating consequences to the investor.

As can be seen from this spreadsheet, the bond principal has eroded from

$1,000,000 to $472,161 after ten years while the purchasing power of the

annual bond interest has declined from $24,000 to $11,332 after tax andinflation. At high levels of inflation a bond investment becomes a

guaranteed loss of principal and purchasing power instead of a safe secure

investment. What does the investor do during the next ten years to maintain

their lifestyle after taking real inflation into account?

The systematic withdrawal for the BMG BullionFund increases every year to

maintain a constant aftertax, after-inflation amount. Based on an annual

appreciation rate of 10 percent and maintaining a cash flow of $24,000 after

tax and inflation, the systematic withdrawal plan results in the original

principal growing to $1,395,505 after the withdrawals. After inflation the

purchasing power of the remaining principal is still $928,159.

The result is that not only do investors maintain the majority of their original

principal, but they are also able to maintain their cash flow on an after-tax,

after-inflation basis.

Investors can personalize the spreadsheet in Figure 13 by going to

www.bmgbullion.com/bondsvsbullion and using their own assumptions

for the variables.


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gbullion.com/bondsvsbullionand

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MYTH 5: GOLD IS AN ARCHAIC RELIC

Gold is often referred to as an archaic relic with no monetary role in todays

modern digital society. However, a number of facts contradict this argument.

Central banks still hold 30,190 tonnes of gold in their currency reserves. Even

though total holdings have declined from 32,000 tonnes held in 1980, the

annual decline rate has been only about 0.5 percent per annum. While some

Western central banks such as those in Canada, Australia, New Zealand, the

Netherlands, Britain and some European countries have reduced their gold

reserves, developing countries, including China, India and Russia, have

increased their holdings.

Gold, silver and platinum are traded on the currency desks of banks and

brokerage houses, not the commodity desks. As a result, it is clear that the

banks and the brokerages, as well as their clients, think of gold, silver and

platinum as an alternative to paper currencies.

As mentioned earlier, the turnover rate of gold exchanged by the members of

the London Bullion Marketing Association averages about $18 billion each

day. Trading volume is estimated at 7-10 times that number. Volume of that

magnitude is clearly not jewellery demand.

MYTH 6: MINING STOCKS ARE A BETTER INVESTMENT THAN

BULLIONWhile mining stocks can generate impressive returns during an uptrend in

precious metals prices, they do not always outperform bullion. Junior

mining companies are subject to numerous risks even though some may do

exceptionally well. Some, however, become worthless. Over 90 percent of

precious metals discoveries never become productive mines. Thats why abetter comparison would be to compare bullion against the larger producers.

Figure 14 (Page 20) shows the performance of Barrick Gold Corporation,

Newmont Mining Corporation and AngloGold Ashanti against gold bullion.

While the miners outperformed bullion during the early stages, bullion has

outperformed the miners since March 2007.

During sharp market declines, mining stocks become correlated to the broad

equity markets rather than the price of bullion. Figure 15 (Page 20) shows the

comparative performance of mining stocks, gold and the Central Fund of

Canada (CEF), a closed-end fund, during the 1987 market crash. As can be

seen from the chart on the next page, mining stocks declined more than

equities even though the price of gold was rising. The exchange-tradedCentral Fund behaved like an equity even though it holds bullion.

Central banks hold30,190 tonnes ofgold.

Mining stocks tendto correlate toequity marketsduring sharp

declines even if theprice rises.


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A comparison of

bullion to the

larger goldproducers shows

gold has

outperformed

mining stocks

since March 2007.

During the 1987

market crash

mining stocks

declined more

than equities even

though the price of

gold was rising.


23/26


During the mature phase of a bull market, mining stocks again tend to

underperform. In the 1970s, Homestake Mining was the largest US miner.

Figure 16 shows that the stock climbed an impressive 900 percent, but gold

increased by 1,500 percent.

As the business cycle changes and the world increasingly loses confidence in

fiat currencies and financial assets, some North American investors maychoose to speculate in mining stocks. However, astute global investors

looking to preserve their wealth will not flock to mining stocks as a safe

haven, but rather to bullion itself. As mine production and the grade of gold

available declines while costs, particularly that of diesel, rise, mining profits

will continue to decline. As reserves are not being replaced by the major

producers, their asset base will tend to decline. As a result, bullion is likely to

continue to outperform the major producers.

S

Global investorswill use bullion as asafe haven ratherthan speculating inmining stocks.


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SUMMARY

As we have seen, the myths about bullion are unfounded. Physical bullion

protects against inflation and has the potential for significant capital

appreciation. Hardly an archaic relic, it is still a low-risk way to preserve

portfolio purchasing power in bull and bear markets. Investors who evaluate

the benefits of physical bullion and take action stand to reap significantrewards.

On the other hand, investors who continue to believe in these myths will

miss out on the opportunity to add an asset class that truly diversifies any

portfolio and provides superior returns to traditional assets such as stocks

and bonds during uncertain times. As these myths are dispelled and the

price of bullion rises, astute investors will benefit from their foresight in

purchasing bullion at its current undervalued cost before the public at large

becomes fully aware of the benefits and bids up the price. When you

consider that total global financial assets are estimated at over $145 trillion,

but total global aboveground gold, including art, religious artefacts and

jewellery is a modest $5.7 trillion (and aboveground investment gradebullion is estimated at less than $2 trillion) a massive wealth transfer event is

very likely to occur. Even a 10 percent reallocation to gold could result in a

1,200 percent increase in the price.

*All amounts expressed in US dollars, unless otherwise note.

Nick Barisheff, President & CEO, Bullion Management Group Inc.

Nick Barisheff is President and CEO of Bullion Management Group Inc., a bullion investment

company that provides investors with a cost-effective, convenient way to purchase and store

physical bullion. Widely recognized in North America as a bullion expert, Barisheff is an author,

speaker and financial commentator on bullion and current market trends. For more information

on Bullion Management Group Inc., BMG BullionFund, BMG Gold BullionFund and BMG

BullionBars visit:www.bmgbullion.com1.888.474.1001

2010 Bullion Management Group Inc. (BMG)

All rights are reserved. No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any meanswithout the prior written permission of the copyright owner. Brief extracts may be reproduced only for the purpose of criticism or review andprovided that they are accompanied by a clear acknowledgement as to their source and the name of the copyright owner.

While every effort has been made to ensure the accuracy of the information in this document, BMG cannot guarantee such accuracy.

Furthermore, the material contained herein has no regard to the specific investment objectives, financial situation or particular needs of anyspecific recipient or organization. It is published solely for informational purposes and is not to be construed as a solicitation or an offer to buy orsell any commodities, securities or related financial instruments. No representation or warranty, either expressed or implied, is provided in relationto the accuracy, completeness or reliability of the information contained herein. BMG does not accept responsibility for any losses or damagesarising directly, or indirectly, from the use of this document.

BMG BullionFund, BMG Gold BullionFund and BMG BullionBars are trademarks of Bullion Management Group Inc.
http://www.bmgbullion.com/http://www.bmgbullion.com/http://www.bmgbullion.com/http://www.bmgbullion.com/


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BMG Special Report - Gold Myths

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