The gold bull market that started during the first quarter of 2001 has now been in play for approximately 11 1/2 years.
Since then gold is up over 565%. With the Fed and Central Bankers around the world now gearing up for even more money printing that means that gold prices will continue to strengthen.
In fact, given the average commodity cycle tends to run in a 13 year bull market, gold appears to be in the last 1-2 years of this ongoing uptrend.
Fortunately, for gold investors, this tends to be the most explosive part of the cycle.
How high can gold prices go?…
According to precious metals expert, Peter Krauth, gold prices will reach $2200/ounce by the end of the year. That's 25% higher from here. Longer term, Peter believes gold will go as high as $5000/oz or more than double where the shiny metal trades today.
That has given one group of investors a lifetime opportunity to double their gains on gold with a unique trade that increases $2 in value every time gold gains a single dollar.
But first investors need to understand why calls for $2200 gold and even $5000 gold are well within the historical patterns.
Why $5,000 an Ounce Gold Isn't Out of Bounds
To start with, let's take the 1980 peak price of gold – $850 – and adjust it for inflation. That would take the price of gold to $2,400 in present-day terms.
Better still, let's take the 2,400% gain that gold experienced during the 1970s and translate it into present-day terms. "
From the 2001 low of $255 an ounce, a 2,400% gain would take the yellow metal all the way up to $6,120 an ounce which makes a $5,000 price projection seem a lot more reasonable.
But these are just superficial price comparisons. If we look at what the fundamentals are telling us, it's clear that gold at $1,770 is a long way from its eventual peak, meaning gold is still cheap
So let's take a closer look.
Five Fundamental Reasons Gold Will Soar
Gold Fundamental No. 1: You Can't Ignore Inflation:
Demand for gold as a store of value has surged amid speculation that inflation will pick up after the Fed, the Bank of Japan and the European Central Bank announced plans to buy more debt. This new money printing has raised inflation expectations pushing gold to new highs.
That follows a pattern established from December 2008 to June 2011as gold soared 70% following the $2.3 trillion dollars created in the first two rounds of quantitative easing. Now that the Fed has made QE3 an open ended proposition, commodities in general and gold in particular will undoubtedly edge higher.
The reason?…With each round of printing, the U.S.dollar becomes worth less and less driving up prices on the whole sale level.
In fact, ever since Nixon closed the "gold window" in 1971 the purchase power of a single dollar has decline to a mere 17 cents.
As Milton Friedman once said, "Only government can take perfectly good paper, cover it with perfectly good ink and make the combination worthless."
Gold Fundamental No 2: Gold is Real Money
The significant fall in the purchasing power of a dollar only strenghtens the case that as a store of value gold is real money. The fact is gold has been a monetary tradition for millennia.
Nearly 2,000 years ago Aristotle laid out what characteristics make for good money. According to Aristotle:
- It must be durable.
- It must be portable.
- It must be divisible.
- It must be consistent.
- It must have intrinsic value.
So it's no accident that the most common basis for money – in all of human history – has been gold.You might want to reread that: the most common basis for money – in all of human history – has been gold. It's no accident.
After all, only gold meets all five of those requirements for sound money.
It is only in the past century that fiat money has supplanted gold or gold-backed currencies on a worldwide basis.
The truth is Fiat currencies like the dollar are just a relatively recent, and failing, experiment in economics. So much so, it's become exceedingly dangerous to hold them of late.
That's why as many as 13 U.S. states want to issue their own currencies in silver and gold.
What's more, Utah has already signed a bill into law recognizing U.S. mint-issued gold and silver coins as an acceptable form of payment.
The coins are treated like U.S. dollars for tax purposes and Utah State citizens can now contract to pay each other in gold if they so choose.
Gold Fundamental No. 3: Investment Demand is Exploding:
Large institutional investors – hedge funds and pension funds – are making large allocations to gold, as are individual investors.
One of them is Pimco's Bill Gross who said in a recent white paper that gold and real assets would be the only ones to thrive in an acute fiscal crisis in the U.S. According to Gross, the latest round of quantitative easing made gold "even more attractive" and owning the metal should be considered as part of a diversified portfolio.
Other analyst agree,
According to Morgan Stanley's survey of 140 institutional investors in the U.S., gold sentiment is now at its highest bullish reading since July 2011. As the chart below shows that has investors now rushing into gold.
Then there the increasing demand for gold overseas.
Asia, with a population that exceeds 2.5 billion inhabitants and a long-standing cultural affinity for gold, is stoking global demand in a big way. In fact, China is overtly encouraging its citizens to buy gold and silver, while offering them gold-linked checking accounts. China is primed to overtake India as the world's largest consumer of gold. A quickly developing middle class whose members are experiencing rapid escalations in disposable income are a major bullish driver for the price of gold.
Gold Fundamental No. 4: Central Banks are Loading Up On Gold:
According to the World Gold Council , central banks bought 254.2 tons in the first half of 2012 and may add close to 500 tons for all of 2012.
What's more the International Monetary Fund (IMF) says Russia added 18.6 metric tons of gold in July. South Korea bought 16 tons — a 30% increase. Kazakhstan increased their bullion reserves for a 12th consecutive month. That shows how gold prices continue to be underpinned by growing demand from the world's central banks.
That's important because in 2009 central banks stopped selling gold altogether and instead became net buyers as a way to diversify away from the U.S. dollar, the euro and other fiat currencies.
Since then, they've settled into a pattern of gold-buying that has been a major force behind the surging price of gold. Since central banks are responsible for 16% of the total global gold demand and are increasing their gold purchases, there is a high probability that gold price will rise over the next few quarters.
In all, central banks across the globe hold 31,353 tonnes of gold as reserves. As fiat currencies continue to crumble investor can expect that figure to rise.
Gold Fundamental No. 5 : A Currency Crisis is Looming:
Five years into this crisis, the United States, Europe, and countless other economies are still struggling. That's why The European Central Bank and the Fed have unveiled plans to fight the crisis and reduce borrowing costs. ECB President Mario Draghi has since announced an unlimited bond-buying program for distressed euro-area nations, while Fed Chairman Ben S. Bernanke has committed to another round of so-called quantitative easing.
And that reality has ignited a crisis of confidence about fiat currencies in the minds of many investors.
Money is nothing more than paper and ink, backed by the full faith and credit of the issuer. When investors find that their faith in the issuer is shaken, the value of that currency erodes. Additional sovereign-debt downgrades from ratings agencies are but one potential trigger of a currency crisis.
According to an August report from the World Gold Council:
"The ongoing sovereign debt crisis in the Eurozone underpinned European investors' enduring conviction in gold's capital preservation properties. Demand for bars and coins from retail investors posted a 15% year-on-year increase to 77.6t; 19% higher than the five-year quarterly average of 65.2t".
Under such conditions, gold – the ultimate store of value, and the oldest existing form of money on earth – will soar as investors seek to protect their purchasing power.
Gold Fundamental No. 5: We've Yet to Reach the Mania Stage:
Every bull market in gold has three stages:
- Stage One: Currency Devaluation.
- Stage Two: Investment Demand.
- Stage Three: A culminating Mania-Buying Spree.
Where are we now?…
At the moment we are nearing the end of stage two which means the mania stage isn't far behind.
Stage Three is when all the stops get pulled out. That's when the public finally becomes aware of gold's progressive rise. It's when we will see a market bubble akin to what we saw with "dot-com" stocks back in the late 1990s, or U.S. stocks in late 2007.
As the mania sets in and higher prices, by themselves, beget higher prices, with gold now rising in the kind of near-vertical climb that is the hallmark of a speculative mania – a bubble.
This is where the $5,000 price point will most likely be reached.
"There's no mania like gold mania," says Peter Krauth, "And despite the fact that we've been in a powerful gold bull market for more than a decade already, I believe the best is yet to come for gold prices."
The mathematical result is almost guaranteed: Gold has to increase in price dramatically to reflect its true value.
So what should you do now to profit from gold's imminent rise?
You can start with the fund pays investors double their money for every increase in on gold.
How to Cash In on the Gold Doubling Effect
In fact, we've dubbed this unique investment our "Gold's Double Reward Program" because it pays double the gains that gold makes.
In other words, a 5% gain pays you 10%… a 25% gain pays you 50%… and so on.
It is the Deutsche Bank Gold Double Long ETN (NYSEArca: DGP).
It is a leveraged (2X) fund based on the price of gold, that holds some physical gold but primarily employs futures and options in a bid to produce percentage gains double that of gold itself on any upmove.
For investors with a bullish short-term outlook for gold, DGP certainly delivers a hefty punch with its 2x long leveraged position in the precious metal. This powerful tool has gained significant popularity since its inception in 2008 and has accumulated just over $480 million in total assets.
As you can see from this chart, the double long ETN has performed true to form since QE3 began to hit the markets in August.
In just a few short months, DGP traders earned over 20% gains as GLD climbed a little over 10%.
Of course, losses on pullbacks are also magnified. That makes this "Gold Double Rewards Program" best used as trading vehicle.
For investors with a longer time frame, there is the SPDR Gold Trust ETF (NYSEArca: GLD) mentioned above.
The price of GLD shares, which are backed by physical gold and issued in blocks of 100,000, generally tracks the price of one-tenth of an ounce of gold, usually trading at a slight discount.
As of mid-May, the Trust held about 1,277 tonnes of gold bullion – the sixth-largest cache in the world – and the fund's market capitalization at the end of June was about $65 billion. It's also highly liquid with an average daily trading volume in excess of 1 million shares.
Another option for those with smaller budgets would be the iShares Gold Trust ETF (NYSEArca: IAU). Its shares are also backed by physical gold, but they're priced at just 1/100th the price of an ounce of bullion, also typically trading at a small discount. The fund has a market cap of about $9.3 billion and a daily trading value of around a quarter-million shares.
Beyond that there's always the traditional approach – holding the physical metal itself.
How to Buy Physical Gold
Purists feel this is the only true hedge against global turmoil and declining values in the dollar and other fiat currencies.
For smaller investors, this typically means buying gold bullion bars, rounds (unadorned coin-shaped pieces) or minted gold bullion coins.
Bullion bars – produced primarily by private mints like Engelhard, Johnson Matthey PLC (LON: JMAT) and Credit Suisse Group AC (NYSE ADR: CS) – come in an assortment of sizes to suit the needs and means of every investor.
The smallest bars weigh just one gram, while the largest weigh 400 ounces.
Gold rounds are produced by the same private refiners, as well as some government mints, and are also available in a variety of sizes, typically ranging from one-tenth of an ounce to five ounces. Prices range from as little as $15 per round over the spot price of gold at the time of the order for smaller pieces to $40 over the spot for larger specialty pieces.
Jewelry-type pieces, such as pendants, are also available, but generally carry slightly higher premiums.
Minted bullion coins come in a far greater variety, being produced by most of the private refiners as well as a number of the world's leading government mints.
Examples of the latter include the American Gold Eagle, American Gold Buffalo, the Canadian Gold Maple Leaf, the South African Krugerrand, the Chinese Gold Panda and the Mexican Gold Libertad.
Specialty bullion "commemorative" coins are also available from both private and government mints, honoring everything from African wildlife to the spouses of American presidents.
Sizes range from one-tenth of an ounce to two ounces, with the one-ounce size being most popular and readily available. Bullion coin prices typically track the spot price of gold, plus a premium of 5% to 6% for the one-ounce issues, which covers the cost of refining, minting and marketing. Premiums on smaller coins can run as high as 15%.
Beware, however, that the premiums for all sizes will be considerably higher if you buy in small quantities or want to pay by credit card rather than with a bank draft or funds transfer.
Where to Find Reputable Gold Dealers
The most important rule, whether you're buying gold bars, rounds or minted bullion coins – or any other physical metal, for that matter – is to deal only with reputable dealers with proven experience and clearly stated policies and warranties. This is especially crucial if you're purchasing by phone or online.
Several well-regarded, long-standing dealers in the U.S. include:
- American Precious Metals Exchange (apmex.com) – This Oklahoma City-based firm offers both bullion and collectible metals products, as well as storage facilities. Quotes are updated every 15 minutes during trading hours. Purchase online or call 1-800-375-9006.
- Asset Strategies International (ASI) (assetstrategies.com) – This Rockville, MD, firm has a large inventory of gold coins, bars and other bullion products, and also offers regular metals markets commentary and analysis on its website. Sales representatives are available at 1-800-831-0007.
- Goldline International Inc. (goldline.com) – Based in Santa Monica, CA, this company has been in business more than 50 years and offers a full range of gold coins and bars from mints around the globe. You can purchase online or through a sales rep by calling 1-800-963-9798.
- Kitco (kitco.com) – One of the world's largest metals dealers with offices in New York, Montreal, Hong Kong and elsewhere, Kitco provides a wide range of gold products and services, including real-time quotes and news updates. Purchases can be made online or by calling 1-877-775-4826.
- The Tulving Co. (tulving.com) – Based in Newport Beach, CA, Tulving provides 24-hour sales and service, tracking trading and price quotes in markets around the globe. U.S. and Canadian investors can call 1-800-995-1708.
Physical gold provides a long-term store of value, but it does carry one added risk – the potential for confiscation, much like what happened in 1933.
That possibility is quite real. As such, if you're seriously considering gold as a hedge against future U.S. political or economic uncertainty, you might consider a storage site for your coins or bars in Canada or elsewhere offshore.
One added note for coin buyers: If what you want is a true hedge against turmoil, inflation and a weakening dollar, stay away from "collectible" gold pieces.
While such coins are beautiful and their value will no doubt increase along with gold bullion, those values are subjective, they carry far higher premiums than bullion coins and they're much harder to sell on short notice.
However you choose to invest, gold's recent price action indicates it could again be ready to make the next up.
In this environment making money is easy. All you have to do is buy gold.