|
Published: October 21, 2009
We’ve all heard that inflation drives up gold
prices. When inflation is on the rise, investors buy more gold
to hedge their portfolios.
And, with all the government bailouts and stimulus packages,
it’s hard to deny that inflation is coming. After all, the money
supply has more than doubled since October.
Yet few people realize that inflation may be the least of the
reasons why gold prices will push higher.
Since bottoming out in 2001, gold prices have risen by nearly
+300% and have twice targeted the $1,000 mark. And that’s
happened in a relatively “inflation-free zone.”
There are other forces at work here. This report will show you
exactly why inflation is only a small part of the gold story.
And, we’ll identify the best ways to profit from the coming gold
rush.
Gold Trend #1: Gold Mine Production is Decreasing.
Annual worldwide mine production of gold has decreased by -9.3%
since 2001. Considering gold prices have nearly quadrupled since
then, why isn’t more gold being produced? The answer is simple.
Resources are being depleted and their quality is diminishing.
And, when a discovery is made, it takes about 7-10 years to get
a mine permitted and into production -- making it difficult to
quickly ramp up gold production.
Gold
Trend #2: Gold is Getting Harder to Find.
Fewer and fewer large gold discoveries are being made
every year. And the discoveries that are being made tend
to be in more remote and less geopolitically attractive
areas. Considering that the risks to opening any gold
mine are considerable, mining companies just aren’t
interested in mining in areas that have significant
political and geographical drawbacks. As a |
 |
| result,
miners are having difficulty replacing depleted
resources. |
Gold Trend #3: Investment Demand for Gold.
Large institutional investors, such as hedge and pension funds,
are making large allocations to gold and gold shares. Individual
investors are also getting in on the action, with gold
exchange-traded funds (ETFs) gaining influence. SPDR Gold
Trust (NYSE: GLD), the largest physically backed ETF on the
planet, is now the sixth biggest holder of gold bullion with
more than 1,000 tons. That is helping to facilitate and spread
the ownership of gold by individuals. In fact, in the first half
of 2009 investment demand for gold is up +150% over the first
half of 2008, according to the World Gold Council.
Gold Trend #4: Central Banks
are Buying Gold.
The Central Bank Gold Agreement,
originally signed in 2001 and
recently renewed for another five
years, limits the amount of gold
European central banks -- including
the International Monetary Fund --
can sell to 400 tons per year. This
means that even if governments want
to sell off their gold reserves,
they can’t -- further straining the
supply of gold on the market. The
U.S., the world’s largest holder of
gold, is holding on to their stash
as well. Some governments are going
even further: Venezuela’s Finance
Ministry now requires 70% of gold
produced in the country to be sold
domestically. At the same time,
Russia, Ecuador, Mexico and the
Philippines are all buying gold. And
China has increased its reserves by
a staggering +76%.
Gold Trend #5: Push for
Gold-backed Currencies.
As investors the world over lose
faith in their government’s ability
to contain the financial and
economic crises, many are calling
for gold backed currencies -- much
like the U.S. dollar was until the
early 1970’s. Even Zimbabwe, which a
year ago had hyperinflation running
at 231 million percent annually, is
now considering reintroducing its
Zimbabwe dollar, but this time fully
backed by assets, including gold. In
order for this to happen, countries
would have to purchase enough gold
to back all their currency --
putting extreme pressure on the gold
supply.
Gold Trend #6: Asian Demand for
Gold is Exploding.
Asia, with its more than two and a
half billion people, has a major
impact on investment demand. Asians
have a long-standing cultural
affinity for gold as a store of
wealth. India is the world’s largest
gold consumer. For the last 50
years, until 2009, the Chinese
government has forbidden its
citizens from owning gold. But now
China is encouraging its citizens to
buy silver -- which automatically
draws more attention to gold. Today,
Chinese investors even have access
to gold-linked checking accounts. As
a result, demand for gold in
mainland China is expected to triple
in the next few years.
Gold Trend #7: Gold is in a
Secular Bull Market.
Gold’s price has increased every
single year since 2001. This is a
clear signal that we are currently
in the middle of a secular bull
market for gold. A secular bull
market typically last about 17 years
and ends with a mania stage where
investors throw the concept of
supply and demand out the window and
frantically invest in gold. We’ve
seen this same pattern repeat itself
over the last hundred years of
investment history and we’re about
to see a major run up in gold
prices. The gold market is very
small in relation to the currency,
bond or stock markets, so when
investors start to pile in, look
out. Prices will go through the roof
-- making the tech and housing
bubbles seem small in comparison.
How to Play the Gold Rally
There are a few ways to play the rise in gold prices. You can
buy investments backed by gold or you can invest in gold miners
themselves.
To play gold prices directly, invest in the SPDR Gold Trust (NYSE:GLD)
Each unit of this ETF represents 1/10th of an ounce of gold.
It’s highly liquid, and provides you with the quickest and
easiest way to get exposure to gold. It’s also the lowest risk
option, without the storage costs associated with buying
physical bullion.
Next up on the risk scale is the Market Vectors Gold Miners
ETF (NYSE:GDX). This investment vehicle tracks the world’s
major gold and silver producers. While more volatile than GLD,
the leverage offered based on the gold price and profitability
makes this an attractive option. And you have the added benefit
of owning some 30 precious metals producers all wrapped into one
simple investment.
Barrick Gold Corporation (NYSE:ABX) is the world’s
largest gold miner. With lots of liquidity, it draws
considerable interest, in particular from big money
institutional investors. Keep in mind, ABX carries more risk
than the two previous options, as you have exposure to a single
company. But this gold mining behemoth is sure to pay off big as
gold rises and eventually soars. -- Peter Krauth
Contributing Editor
Money
Morning |
