Gold investors are a happy bunch. Those with the luck or foresight to have boarded the golden railroad back in 2001 made a fivefold investment in the "metal of kings." That works out to compounded return of better than 20% a year.
Such a torrid performance has evoked claims that this is just another financial bubble – one that's soon to burst.
But the reality is that anyone who classifies this bull market in gold "nothing more than a bubble" simply hasn't looked at the market fundamentals, doesn't understand them, or has some ulterior motive to throw off other investors.
Precious metals – and gold in particular – have been the asset class of the decade. But it's not too late to climb aboard; there's still plenty more growth to come.
In fact, before 2011 closes out, I predict that each ounce of the prized "yellow metal" will be trading at $1,900 – an increase of about 37% from the recent closing price of about $1,390 an ounce.
I've got a high degree of confidence in my prediction. And with good reason.
The Four Catalysts For Higher Gold Prices
After many years of covering the gold, commodities, and mining sectors, my research and observations all indicate higher gold prices for years to come.
Indeed, there are four specific trends that promise to keep gold prices on an upward trajectory. I'm referring to the fact that:
- Ongoing global stimulus initiatives figure to ignite inflation, which is highly bullish for
- The concept of "peak gold" is real, and even in the face of record gold prices, miners can't
seem to crank out enough of the "yellow metal."
- Global demand is burgeoning as wages rise in such newly emergent markets as China and
India – a trend that's not going to quit.
- Global investors remain dramatically under-invested in gold.
Let's look at each of these four catalysts.
1) With QE2 in the Books, Are We Looking at QE3, QE4, and QE5?
In the past two years alone, the U.S. Federal Reserve, the European Union (E.U.), and central
banks in China, Japan, and a host of other nations have chosen to "stimulate" their economies by
ramping up spending and cranking up their printing presses. Many trillions of dollars of liquidity
have been injected into the global economy.
That's going to lead to inflation. It already has in the "volatile" food and energy segments
(thought the U.S. government conveniently leaves those out of its twisted consumer price index
The U.S. central bank's $600 billion "QE2" initiative will fail to boost the economy and/or
lower unemployment in any meaningful way in 2011. Instead, that "hot money" is making its way
to emerging-market economies, where it's being plowed into hard-asset resources such as gold.
Even so, if there's one likelihood we can rely on, it's that U.S. Federal Reserve Chairman Ben
S. Bernanke will continue to do the one thing that he seems to excel at – printing money. As the
reality of an ineffective QE2 sets in, there will be cries for a QE3, which will also fail to produce the
desired results. That will force a QE4, then a QE5 and… well, you get the picture.
Eventually, inflation will take hold like a virulent virus – and will be just as hard to halt. The
omniscient Fed's plan is to just raise interest rates to tame inflation and mop up the massive
liquidity. But our central bankers are likely to be taken by surprise and end up moving too late.
If you doubt this, just remember the subprime mortgage crisis, and Lehman Brothers Holdings
A severe loss of confidence in the greenback could push bond prices lower and cause yields to
soar virtually overnight, beating Bernanke and company to the draw. And a badly weakened U.S.
dollar will devastate millions of savers.
If that doesn't scare you, consider this: At its current pace, every 18 days, the U.S. government issues debt equal in value to a full year of gold production. Every year, the United States borrows
the equivalent of a full one third of all the gold ever mined.
2) Peak Gold Is Real
Despite record nominal gold prices, gold miners just can't crank out enough of the stuff.
Between 1997 and 2001, miners "high graded" (mined ore with the highest grades) just to
keep the lights on, as gold prices bottomed and the yellow metal was reaching the peak of its
secular bear run.
Ever since, as gold prices have steadily climbed, these miners have been shifting production
to gradually lower grade ore, leading to ever-lower output. In fact, in just the past five years, the
average recovered grade has declined a full 30% – dropping from 1.8 grams per ton down to 1.3
grams per ton.
And the grades of replacement ore being found are now averaging about 0.60 grams per ton,
meaning twice as much ore has to be found just to replace gold being produced at current grades.
Gold has become so valuable that millions of tons of what was formerly considered "waste rock"
are now being recategorized as gold reserves.
Economic theory tells us that as demand increases, so does supply, which helps to contain
prices. In the case of gold, however, that just isn't happening. There's simply not enough new
gold being found to replace consumed reserves and to allow for higher production levels.
Over the past year, gold production has only managed a 3.0% increase, despite a 20%
increase in price.
3) Demand Is Burgeoning
Chindia (China and India) – with 35% of the world's population – is one of gold's biggest
fans. India is the world's largest gold consumer. Last year, Indians bought just under 500 tons of
the stuff. Both India and China, are on pace in 2010 to better the consumption levels of 2009.
For its part, Indian demand for gold jewelry is expected to have increased by about 11% in
Worldwide, investment demand for gold will be up, led by China, India, Russia, and
Turkey. "Bar hoarding" is on the rise, too, increasing 44% over 2009, as investors increasingly
take physical delivery of their merchandise, reports the World Gold Council. In fact, net retail
investments in 3Q/2010 set a record at $9.6 billion – a staggering 60% increase over 3Q/2009.
Refusing to be left behind, jewelry and industrial demand also posted year-over-year third-quarter increases of 8% and 13%,
What's particularly fascinating,
though, is the level of buying also driven by
central banks, mostly in the Middle East and
Asia. In the past year, we've seen India, Sri
Lanka, and the Republic of Mauritius buy a
total of 212 tons of International Monetary
Fund (IMF) gold at $1,050 per ounce,
followed by Bangladesh, which purchased
10 tons at $1,275 per ounce.
Russia absorbed a full 63% of its own
2009 production, amounting to 130 tons.
Even Iran announced that it is converting
$45 billion into a mix of euros and gold. In
fact, a smaller (unnamed) Mideast nation
has indicated that it is converting 200,000
barrels per day of oil production into gold,
the annualized equivalent of 140 tons of
gold yearly at the current oil-to-gold ratio.
4) Global Investors Remain Underinvested in Gold
I could give you a whole song and
dance on this point, but I really don't need to. As it currently stands, the average investor, both
retail and institutional, is sorely under-invested in gold-related holdings.
As the graphic shows, just after gold prices hit their peak in their last secular bull run, gold
and gold-mining shares represented 26% of global assets. In 2009, investment levels in these
same sub-sectors represented a microscopic 0.80% of global assets. Clearly, gold has a long way
to go, just to become a significant allocation within the average portfolio.
So if you've been asking yourself that burning question – "Is gold in a bubble?" – rest assured
that the answer is still a resounding "No!"
and as much as $5,000 or more an ounce over the long haul, gold should be a part of every
investor's portfolio. Let's look at the best areas to focus on.
Gold Miners: If you want some leverage on the price of gold, then one of the preferred ways
is to own a group of elite gold miners. One simple vehicle to gain this kind of exposure is through
shares of the Market Vectors Gold Miners ETF (NYSE:GDX). Gold-mining powerhouses Barrick
Gold Corp. (NYSE:ABX), Goldcorp Inc. (NYSE:GG), Newmont Mining Corp. (NYSE:NEM), and
AngloGold Ashanti Ltd. (NYSE:AU) account for nearly 50% of the current weighting.
It's important to note that gold stocks typically offer an average leverage ratio of about 2:1 on the
performance of the price of gold. On a five-year basis, gold shares have lagged, but in the two years
since the 2008 stock-market panic, they've been delivering that 2:1 return. On a longer-term basis,
the ratio still sits about 20% below the level that would reflect a two-for-one leverage – a "limitedtime
offer" I expect will not last.
Contract Drillers: An indirect way to play this sector is via the classic "pick-and-shovel"
approach, in which my network of industry sources has provided me with some impressive internal
numbers. Junior miners – those that typically focus on new or expanding discoveries – are estimated
to have increased their exploration budgets some 60% over 2009. That places specialized contract
drillers in a particularly sweet spot.
As demand for their services swell, expanding their profit margins, their stock prices could truly
soar over the next few calendar quarters. And I believe the bull market in these shares is likely to
last even longer than that. I have one such holding in my Global Resource Alert advisory service
that's up 80% in a bit more than a year. For more information on the Global Resource Alert, please click here.
[Editor's Note: One tiny mining company… one HUGE discovery… $49.2 billion huge – from the most foughtover
metal on earth. Not gold, uranium, or iron… this scarce metal is critical to energy's future, and everyone
wants a piece. Demand from the U.S., China, and even the OPEC countries, is about to send shares of this quiet
company soaring. This presentation tells the full story.]
About the Author
Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.