[Editor's Note: With the New Year upon us, it's a good time for investors to be looking ahead. With that in mind, Money Morning will be running installments of our "Outlook 2009" economic forecasting series into the New Year.]
By Mike Caggeso
Associate Editor
Money Morning
Gold hit two historic milestones in 2008.
First, in early March, the “yellow metal” hit its all-time high of $1,030 an ounce.
Just three months later, the price of gold for December delivery had plummeted to $681 an ounce, a 21-month low and 33.9% drop from its record high.
Most gold bugs were equal parts puzzled and broken-hearted. The world’s stock markets tanked, as did some of its biggest economies. In such an environment, they thought, gold should have risen. After all, gold is widely considered to be a safe-haven investment when everything else is spiraling south.
However, Money Morning Contributing Editor Martin Hutchinson – an investment banker with more than 25 years’ experience on Wall Street and a leading expert on the international financial markets – understood perfectly what other investors did not.
“Gold is not a safe haven against recession,” said Hutchinson. “It’s a safe haven against inflation.”
In the past year, commodities prices skyrocketed – across the board. That was especially true of oil, which hit a record high $147 a barrel. Corn, wheat, and soybeans all hit record highs, as well.
That price escalation tightened household and corporate budgets, and was a primary reason why the U.S. economy posted a gross-domestic product (GDP) decline of 0.3%. With that negative growth, the third quarter was the beginning of what many experts believe will be the nation’s first recession since 2001.
However, the inflation epidemic has waned significantly, as global demand for raw materials has plummeted.
Price for such staple foods as corn, soybeans and wheat have all come down from their record highs – in near-lockstep fashion.
Corn futures are down nearly 50% from their summer high of $8 per bushel. The same is true of soybeans and wheat, with each having lost roughly half their value. In fact, wheat hit a 16-month low in mid-October.
As most of us noticed, gas prices have fallen 48% from their July 17 high of $4.114 a gallon.
And not coincidentally, gold has fallen 22% in that same time frame.
However, this report examines the pending commodities rebound – a projected slow-and-steady increase in commodity prices that will reverse the breakneck plunge below fair value that commodities have experienced for much of this year.
Our objective now: To chart the expected path of gold prices in the New Year.
This report also reveals another wild card inflationary indicator that Hutchinson believes will carry gold prices to $1,500 an ounce by the end of 2009.
Two Catalysts For Gold’s Climb
The U.S. Department of Agriculture’s Oct. 10 Crop Production Report said acreage for a handful of staple food commodities has shrunk:
- Corn acreage fell 1.2%.
- Soybean acreage dropped 1.4%.
- Canola acreage dropped 1.9%.
- Sunflower acreage shrank 0.8%.
- And acreage of dry edible beans fell 0.7%.
That naturally translates to higher prices because it squeezes the supply of the particular commodity. And it does so at a time when demand continues to escalate from populations in China, India and Latin America. And higher prices equal inflation.
But Hutchinson – who correctly predicted this last run-up in gold prices – says there’s another catalyst that’s right now inherent in the U.S. economy that could help vault gold prices to $1,500 an ounce by the end of 2009. And it has to do with the much-ballyhooed $700 billion rescue plan.
“The government is pumping money in so many banks, and that money has to come out somewhere,” Hutchinson said.
The philosophy behind the rescue plan is elegantly simple: By providing a portion of the $700 billion to foundering U.S banks, the Treasury Department believed it could provide banks with badly needed capital, and get them to start lending money once again – jump-starting the economy in the process.
Since September 2007, U.S. Federal Reserve policymakers have cut the benchmark Federal Funds target rate nine times – from 5.25% down to the current 1.0% rate – to increase bank-to-bank lending and bank-to-consumer lending.
“The government is pumping money in so many banks, and that money has to come out somewhere,” Hutchinson said.
Right now, banks aren’t boosting lending. Instead, they are using the cash to finance buyouts of other banks. Even so, that money will “come out” into the economy in the form of higher stock prices for banks. That will make consumer/investors wealthier, and could make them more confidence in the economy. If they’re more confident, they will spend. As that happens, food prices should begin ticking upward, adding another set of thrusters to gold prices.
“Everybody thinks that because we’re having a horrible recession, we’re not to going have inflation. I think that’s probably wrong,” Hutchinson said. “I think gold has quite good hidden-store value.”
As gold prices increase, count on more investors leaving the sidelines to invest, too, causing the surge in gold prices to accelerate and steepen.
“As gold goes up, it gets more popular and investors start piling into it,” Hutchinson said.
And if gold gets anywhere near the $1,500 mark, sell. Prices that high will likely fall back or plateau as the Federal Reserve begins raising interest rates and strengthening the U.S. dollar, Hutchinson said.
Five Ways to Play Bottom-Basement Gold
Before we get too far ahead of ourselves, let’s first look at five ways to play bargain-basement gold prices.
The SPDR Gold Trust ETF (GLD) – formerly StreetTracks Gold – is a fund whose shares are intended to parallel the movement of gold prices. Since gold prices started falling along with gas prices, SPDR Gold Trust has stayed within a 0.5% margin of gold prices. This exchange-traded fund (ETF) eliminates any investor concern over storage and delivery while giving them exactly what they want – gold.
Toronto-based Barrick Gold Corp. (ABX) has 27 mines, mostly in North America and South America, and is developing or exploring 11 more. With a market cap of more than $20 billion, it has considerably more liquidity than most mining companies. Barrick is primarily a gold miner, but it also has copper and zinc mining operations. As far as investors are concerned, there are two ways to look at that: It’s not a pure play, per se, but then again, this is a company stock, not a bar of bullion. Also, having operations other than gold can help stabilize the company’s bottom line in case problems arise at a gold mine.
Denver-based Newmont Mining Corp. (NEM) is primarily a gold producer with operations in the United States, Australia, Peru, Indonesia, Canada, New Zealand and Mexico. Its reserves are hovering around 86.5 million ounces. Like Barrick, this is a mining stock play, and is subject to market swings – as well as fluctuations in gold prices. That can be a significant tailwind, especially if you believe the stock market has bottomed out or is close to doing so. Hutchinson – forever a value-oriented investor – warned that Newmont might be a little too pricey now. Investors may want to wait for the company’s stock price to settle before getting in.
Hutchinson thinks the best value for a gold mining stock can be found in Yamana Gold Inc. (AUY), another Toronto-based company that’s small now, but has rapidly expanding production.
But for investors who just want gold – not an ETF or stock – the best avenue is an EverBank Select Metals Account: EverBank accounts has a minimum deposit that is 98% lower than its competitors, and its commission costs are up to 86% lower than other metals’ brokers and bullion banks. It offers two types of gold accounts: Unallocated (your purchased gold is pooled with that of other investors, eliminating storage and maintenance costs; the minimum deposit is $5,000), and Allocated (you directly own the gold you purchase, held in your own private account; $7,500 is the minimum deposit here).
Both types of accounts can be set up 24/7 online. But if you prefer the phone, call 866-326-6241, and be sure to give them the code 12608 when setting up an account.
We should point out that the publisher of Money Morning has a marketing relationship with EverBank, but that’s because its products are among the best in class.
[Editor’s Note: Money Morning continues to track the global financial crisis, chronicling the key news stories emanating from the global financial crisis. With the U.S. financial markets in such disarray, we’re using our affiliated monthly newsletter, The Money Map Report, to spotlight the very best profit opportunities we’re discovering in markets throughout the world. In our newest report, we’ve discovered a corporate gem that’s riding the profit wave of the most-powerful global trend we’re following right now. If you act immediately - as an added bonus - you’ll also receive a free copy of CNBC analyst Peter D. Schiff’s New York Times best seller, "Crash Proof: How to Profit from the Coming Economic Collapse.]
News and Related Story Links:
- Money Morning 2009 Economic Outlook Series (Part I):
Money Morning Outlook 2009: Obamanomics Offers Investors Plenty of Profit Plays in the New Year. - Money Morning 2009 Economic Outlook Series (Part II):
For the U.S. Economy in the New Year, the Pain Will Precede the Promise. - Money Morning 2009 Economic Outlook Series (Part III):
Unprecedented Volatility Will Continue to Rock the Stock Market in Advance of a Possible Rebound in Mid-2009. - Money Morning 20090 Economic Outlook Series (Part IV):
If Japan Bounces Back in the New Year, Investors Will, Too.
- Associated Press:
Gold briefly drops to 21-month low as stocks fall
- MarketWatch:
Food/Fuel Reality Check: "Speculative Bubble" Was Real Source of Corn Price Increases Says New Study
- Truth About Trade & Technology:
Glory Days Fade for U.S. Farmers
- CNNMoney.com:
Oil settles above $67
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Thank you for the info on Gold.
Please comment on the pros & cons of owning equity shares in Central Fund of Canada, LTD whch trades on AMEX, CEF.
This funds assets are held in gold and silver bullion.
Thank you
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The following is from my November 12th post on NicholsOnGold.com:
The United States Treasury and the Federal Reserve are throwing a trillion dollars, more or less, into the banking system. And, there’s surely much more to come.
It’s not only the U.S. monetary authorities pumping up the money supply. Their counterparts in every major economy – including the United Kingdom and the Euro zone, China, Russia, Japan and on and on – are doing likewise.
We have never – in the history of money – seen such an expansion in its supply without, after a period of time, a rapid deterioration in its value, in other words, without a rapid increase in the overall price level. More than any other factor influencing the gold market, it is the inevitable rise in price inflation that will propel gold skyward in the next few years.
[…] Money Morning contributing editor Martin Hutchinson said in a recent column that the Fed’s rate cuts – combined with the government’s $700 billion bailout – will push so much money into the financial system that the final result will be widespread inflation – which is essentially an open invitation to profit from gold. […]
[…] Money Morning contributing editor Martin Hutchinson said in a recent column that the Fed’s rate cuts – combined with the government’s $700 billion bailout – will push so much money into the financial system that the final result will be widespread inflation – which is essentially an open invitation to profit from gold. […]
GOLD CAN TOUCH HIGH OF $1750
I also belive that gold prices will retouch atleast at $1033 the recent top. As technicals, if as a correction prices drops to 33% of the top and bounce backs, prove that bulish trand is there.
Gols has face the correction. It dropped to $681 nearly 33/34% and jently has got prices at $734/735, tried to loose the lavel, even has not sustains this lavel and is succeceed to mattain the second critical lavel of $822.
In the point of my study, gold prices should touch the top again in very new future, and if happens and sustain at the lavel, the 'journey' towards $1750 the double of it's previous top of $850 ( before apro. 28/29 years ago ) wiil start.
RAMESH SANGHVI…INDIA
Hi Guys,
What is your opinion on Seabridge Gold (SA)?
One thing of playing gold for the 1st Q in 2009 would be Moto Goldmines – MGL – Torontro.
Reviewing is over, new upgrades are expecting, underground study too. A takeover is very propable.
Haywood NAV recommendation: 5,80 US Dollars (without the Resources Upgrade)
Big Investors: Frank Holmes, McKenzie
If you really beleive GOLD will rise …..why bother with a plethora of gold stocks? …….and TRY to pick the best one , SIMPLY buy UGL, an ETF by Pro Shares which bets the price to go UP with a DOUBLE BETA . That means if Gold Rises 1% UGL should go UP 2%
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The tail keeps wagging the dog, Grains and energies will again go on a tear,as they always do , their 2x and 3x EFTs are largely ignored now but are bargains against inflation. There are opportuniyies galore as many sit in fear worrying about a euity market that may be wounded for years as an investing vehicle but may now be more of a "trading" vehicle than ever. Funny how things work out….
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