During a recent call, we asked our natural resources and commodities expert Peter Krauth the following question:
If you had $100,000, and you had to invest it all in one place right now, where would you put it?"
Peter's response: "That's easy. GOLD."
(And it took him all of half a second to answer… )
As Peter sees it, Europe's sovereign debt and banking crises, America's anemic economy, employment picture, and never-ending debt issues, have all raised the spectre for further significant global economic shocks. (To learn how to play these events, and more, for incredible potential gains, take a look at our latest Private Briefing report right here.)
To deal with these problems, Peter has no doubt that even more massive and growing bailout funds, as well as more Fed quantitative easing, are the "solutions" that will be proposed and then implemented.
And that has placed a shine on the ultimate safe haven investment: Gold.
Some of you may be thinking gold's still near record highs, so how much further could it possibly go?
Well, consider that's what the doubters have argued over and over for the past decade.
Our forecast is for gold to reach $2,200/ounce by the end of the year.
How can we be so sure?
Here are three fundamental reasons why the gold bull market will begin running northward again in no time:
#1: Central Bankers are Buying Gold
For the first time since 1965, central bankers are purchasing gold.
According to World Gold Council, the central banks have increased their gold collections by 400 metric tons or almost 882,000 pounds in the last 12 months.
That's more than twice last year's 156 tons.
Look for this trend to continue from central banks.
Jeff Christian, founder of New York-based commodities consulting firm CPM Group, told Barron's that central banks "will probably be continuous buyers of small volumes of gold for the foreseeable future," accounting for roughly 10% of the gold supply.
Christian noted that central bankers will avoid buying any quantity that dramatically affects the price of gold. Yet steadily buying up 10% of the annual supply is certain to help buoy gold prices.
#2: Short-term Speculators are Exiting the Marketplace
While central bankers have entered the gold market, short-term speculators are headed toward the exit.
Open interest in managed futures funds, which is a good representative for speculators, has tanked 28% since last year's all-time high in gold prices.
George Gero, a precious metals strategist at RBC Capital Markets, told Barron's, "I think we'll see more volatility in gold because of the absence of speculators." Speculators can usually put a damper on volatility because they provide higher liquidity just by moving in and out of the market.
Gold prices could be ready to make major moves in very short periods – too big and fast for speculators, reported Barron's. Without the speculators, long-term gold investors – who can withstand short-term volatility – will get back in the market to protect against weakening fiat currencies.
"The best way to play gold is as a long-term investor as a hedge against loss of purchasing power of paper money," said Gero.
#3: Gold Sentiment has Plummeted
Sentiment surrounding the gold sector has been increasingly negative this year.
The Hulbert Gold Newsletter Sentiment Index, which measures the exposure recommended by short-term gold market timers, was recently negative for 29 straight days — longer than any other stretch in history.
In other words, how investors view gold is about as negative as it can get, and is ready to reverse.
"Gold traders' increasing impatience has led even more of them to throw in the towel – which, in turn, is why contrarians are confident that gold's next major move is most likely up," Mark Hulbert told Money News last month.
Meanwhile, gold stocks are cheap. The gap between gold stocks and gold prices widened to almost historic highs this year. Right now, stocks are trading 29% below where they should normally trade, according to John Doody of the Gold Stock Analyst.
The only time these stocks have ever traded at a greater discount was in the October 2008 crash – when market fears drove investors out of all stocks, sending gold stocks plummeting 34% below their normal relationship with the precious metal.
This means many gold stocks are badly oversold, and the upside potential for gold shares clearly outweighs the downside risk.
These three factors will drive gold prices northward in coming months, and that means a major opportunity for investors.
If you don't already own some gold, the time to buy is now… before you miss out on anymore of this historic bull market.
Read on to discover exactly how to participate in the gold rush happening right now.
There's nothing like holding a gold coin or bar in your hands.
It's the oldest and most direct form of gold ownership. In fact, in some cultures, people keep their entire savings in physical gold.
Bullion dealers are the easiest way for most investors to buy gold.
But do some homework to check them out before you buy. Under normal circumstances, expect to pay 3%-6% premiums above the spot gold price for physical gold (You can find the spot price at Kitco.com.).
But when things get hairy, like in the heat of the financial crisis, premiums can go up 3-5 times higher, with some dealers charging 10%-15% above spot. Obviously, you're better off waiting for price dips and calmer circumstances.
You can buy gold bars in a variety of weights, ranging from as small as one ounce to over 100 ounces. Just be sure you have a safe place to store your shiny new asset.
A couple of dealers that have an established reputation are:
- Kitco.com: Premiums are fair and the selection is usually quite good. They have offices in both New York and Montreal (Canada).
- Assetstrategies.com: This dealer is located in Maryland. They also offer gold storage options outside the U.S.
Don't have a vault to store your gold in? You might want to look into paper gold.
There's no replacement for owning physical gold. But it's not always easy to store, and buying and selling it takes some extra effort. Luckily, gold ETFs have sprung up to fill the void.
One of the easiest ways to buy a claim on gold is the SPDR Gold Shares (NYSE:GLD). With a market cap of $35 billion, GLD is now the largest physically backed ETF in the world, holding 1,230 tonnes of gold in a London vault. GLD shares, which represent one tenth of a gold ounce, can easily be bought and sold by investors through their brokerage account.
Another option to acquire paper gold is through Perth Mint Certificates (PMC). Locked away in a vault and insured, this is the only government-backed bullion storage program, with the State of Western Australia standing firmly behind it.
You'll need to commit at least $10,000 to get started in PMCs. And, there are small, but reasonable, fees to obtain your certificate and trade your holdings. But, it's also a great way to gain some international diversification for your gold investments, by owning it outside of your home country. As a side note, Kitco and Asset Strategies also offer PMCs.
The third major way to invest in gold is through gold stocks. And here again you have a multitude of options.
The most important thing to remember is that with stocks come leverage and volatility.
That's great when gold goes up, but it can be less than pleasant on the way down.
The most common way to track gold stocks as a whole is through the Amex Gold Bugs Index (NYSE:HUI). This is an index of large miners operating around the world.
As for individual gold stocks, there are four main categories in descending order of risk: major producers, intermediate producers, junior producers, and finally junior explorers.
Major Producers churn out at least 1 million ounces a year, and include the world's largest gold miner, Barrick Gold (NYSE:ABX). With 138 million ounces of resources, and producing 7.8 million ounces annually, this is the undisputed leader.
Intermediate Producers are the next tier. They produce in the 200,000-1 million ounces range. With intermediates, you'll want to look for good geopolitical characteristics, as well as a decent anticipated growth profile. Many have multiple mines and reliable cash flow.
Junior Producers are sub-200,000 ounces of annual production, often sourced from a single mine. Here you'll want to aim for the potential to grow the company's production and resources over time through existing or new projects.
Junior Explorers are among the most volatile stocks around, but they come with moon-shot potential. Some have gold assets in the ground, while others are still looking. Their shares tend to trade on relatively low volume, which adds to their risk. But they also account for many discoveries of new deposits. Once sufficient gold's been found, some aim to become producers, while others look to sell that asset to a major, and then go on exploring.
Gold Streaming Companies are a new segment of the gold industry. And they're already making tidy profits for their investors.
Streaming companies lend up-front capital to gold miners. And as payment, they take a percentage of the gold found in the mines.
This strategy allows streaming companies to avoid the risks and unexpected costs associated with mining operations. And it provides incredible upside as gold prices rise.
Money Morning Private Briefing just uncovered the perfect gold streaming stock for new investors. And it's already up 36% from its original buy price. To find out how you can get the ticker symbol and recommendation for this streaming company, and 7 other new gold stock picks, take a look at the latest Private Briefing special report right here.
Gold Stock Mutual Funds
The most conservative gold approach is to invest in a gold or precious metals mutual fund. This is the least direct way to buy gold, because, by law, mutual funds have to earn at least 90% of their income from securities. That means at most only 10% of the portfolio is allocated in physical gold.
We suggest you take a good look at the US Global Investors Gold and Precious Metals Fund (USERX). It's strictly limited to gold producers.
For a little more octane, consider the US Global Investors World Precious Minerals Fund (UNWPX), of which 80% is invested in producers and 20% in junior miners.
Hold Gold for the Long Term
The bottom line: If you don't own any gold yet, you're still in luck. Despite a great showing over the past 10 years, gold's still got a long way left in its long-term bull. In fact, one major gold driver, inflation, has only begun to rear its ugly head. So you haven't missed the boat.
For eight brand new gold recommendations from our top natural resources and mining editors, take a look at the latest special report from Money Morning. Inside, you'll learn how you can get access to the Private Briefing portfolio – and more than $28,000-worth of our best investment research – for just $5 a month. Go here now.