What's driving
Gold Investment demand today...
BACK IN 2001, writes Byron King
for the
Rude Awakening, gold traded as low as $250
per ounce.
Then, over time, gold rose slowly, but steadily, as
investment demand rose, reaching just over $1,000
per ounce early in 2008. Gold pulled back and
hovered in the range of $800-900 for much of 2008
and then climbed back up to the $1,000 mark again in
February 2009.
Despite a pullback in March, it looks like gold
wants to break the $1,000 mark again...and stay
there. Indeed, the
Gold Price may see $2,000...even $3,000 I
believe...in the next two years.
But before we get to that, let's explore a few of
the driving forces behind
Gold Investment and its once and future position
as the ultimate hedge against government-sponsored
fiscal idiocy.
Along with the generally rising
Gold Price trend, demand for physical gold is
heading toward record levels this year. Worldwide
mine output is almost entirely locked up. Smelting
and refining operations are running flat out, if
they can get their raw materials. Mints around the
world, from the South Africa Mint near Johannesburg
to the US Mint at West Point, are booked solid.
The increase in demand for
Gold Bullion is remarkable. It's occurring
during a period of relative strength in the Dollar,
and when investment in other types of commodities
has all but collapsed. Then again, the decline in
other commodities has spurred the rise in
Gold Prices, as well as a rising price for
silver. That is, much of the world's gold and silver
comes as a byproduct of copper mining. Much more of
the world's silver is a byproduct of mining lead and
zinc. But copper, lead and zinc operations have all
scaled back dramatically in the face of the
worldwide recession and credit freeze. So there is
less gold and silver coming from the mouths of the
mines.
The increase in gold exchange-traded funds (ETFs)
like streetTRACKS Gold has also been dramatic. The
ETFs advertise that they buy physical gold and
silver, to reflect a 1-for-1 investment of funds for
metal. This is not entirely true, I believe, in that
ETF holdings of physical metal are almost surely
less than the stated amounts, just due to the
difficulty of securing metal from the refineries.
Still,
ETF holdings are rapidly approaching half of the
world's annual mine supply. According to a recent
estimate by Citigroup, "If
ETF inflows continue at current rates,
investments will be 1,900 tonnes in 2011, at an
implied price of $1,300 per ounce." Based on public
statements by
Gold ETF managers, the business model is to get
to 100% full backing of all
ETF financial assets with physical metals.
In the current environment of massive government
spending worldwide, many savvy investors and
institutions see a fearsome, systemic threat to the
broad financial markets. This drive to find relative
safety is part of the movement to acquire and hoard
physical gold and silver. Thus, the demand for
Gold Coins and bars should hold steady or
increase, and "safe-haven demand" will support
higher prices – potentially much higher prices – for
precious metals.
It's fair to say, however, that the bullish trend in
gold and silver has crowded the trading pits. So any
investor in precious metals has to understand that
signs of stability, particularly a return of market
confidence, will almost certainly cause a quick
pullback in gold and silver prices. But in my view,
any period of weakness is likely to be short term.
There is just too much future inflation already
baked into the world's monetary pie.
One important commentator on
Gold Prices is Peter Munk, founder and CEO of
Barrick Gold, the world's largest gold-producing
firm. Recently from Switzerland, Munk expressed
optimism about gold. "I have to think [Gold Prices]
are going to be significantly higher than last year,
just like last year was higher than the year
before," Munk told Reuters News.
According to Munk, the recent injection by the
Federal Reserve of new currency into the money
supply is an "enormous, enormous inflationary
factor" for the Dollar. This will make gold and
silver "more and more desirable." In addition, "Gold
has got a very strong and stable support right now
as long as we have this enormous uncertainty out
there. And I think this uncertainty will probably
last for a while, because I don't see any major
catalyst that can turn this around."
Finally, Munk said, "Every year in the last three
years as the world becomes less and less secure in
terms of normal investments and people lose faith
and confidence in bonds, stocks, secured debt
instruments, people turn to gold. It automatically
attracts people in direct proportion to their fear,
and that is fear of losing their money."
Founded by Munk in 1983, Barrick Gold is among the
world's largest gold miners. Barrick has pursued
growth through judicious expansion and a continuing
process of acquisitions. "Barrick has grown," said
Munk, "primarily through an aggressive acquisition
program in the last 25 years. So of course, we'd be
on the lookout all the time for strategic
acquisitions or mergers...The major gold deposits
throughout the world in the main have already been
found, so it's getting more and more difficult, and
that's why you see global gold production heading
downward, despite higher prices and increased
spending on production."
According to Munk, Barrick is unlikely to diversify
further into base metals. But Barrick will likely
recover larger amounts of copper as it mines for
more gold. "It is inevitable that [Barrick's] copper
production will grow," he said. "If the world
straightens itself out and we resume growth and
expansion – and I don't think we will, by the way,
not on the short term – then copper is a wonderfully
profitable base metal to mine."
The bottom line in all of this is that you should be
sure to pad your portfolio with gold and silver,
both the physical metals and shares in quality
mining companies. The future is bright for gold and
silver.
Tuesday 12th May 2009
