Gold is proving its resilience as the dollar declines. The yellow metal continues to break price records, and is on track to hit $2,000 an ounce as demand outstrips supply. With world banks likely to follow India’s recent landmark purchase, and opt for precious metal assets over the greenback, mining companies, gold funds and gold producers are promising investment vehicles for those hoping to capitalize on gold’s wild ride. See the following article from Money Morning for more on this.
Gold has surged 60% in the past 12 months and it’s not letting up. The “yellow metal” is continuing that scorching surge into the last part of the year, establishing new highs on a near-daily basis. In fact, gold established yet another record price Wednesday when it peaked at $1,153.40 an ounce on the New York Mercantile Exchange (NYMEX).
And the records are going to keep on coming.
With the U.S. dollar in a freefall and global gold demand rising, analysts say the precious metal will likely continue its bullish trend through at least the first half of 2010. It could rise as high as $2,000 an ounce, which would represent a 73% gain from current record levels.
“Everything is pointing to the price of gold going higher,” Mike Sander, an investment adviser at Seattle-based Sander Capital Advisors, wrote in an e-mailed report.
And “a whopping budget deficit continuing to balloon, a Federal Reserve in no place of raising rates, and central banks all over the world diversifying away from the dollar,” will be the main catalysts for gold’s continued rise, he said.
Indeed, the U.S. Federal Reserve’s loose monetary policy has put the dollar under duress. The central bank has pumped more than $2 trillion into the U.S. economy since the financial crisis began more than two years ago. It has lowered its benchmark Federal Funds rate to a record-low range of 0%-0.25% and it has stepped up purchases of U.S. Treasuries and mortgage-backed securities.
More recently, the return of investor risk appetite and the widespread belief that the Fed will have to keep its stimulus measures in place as the U.S. economy struggles out of a long and deep recession have put downward pressure on the greenback.
The dollar tumbled about 20% against the euro in the past year, and the Dollar Index – which measures the greenback against the euro and five other currencies – fell to a 15-month low of 74.679 on Monday and was retesting that low as of Wednesday.
With the dollar in freefall, central banks and hedge funds have sought shelter in hard assets, particularly gold. That’s a big reason why gold has experienced such a remarkable run this year.
“You have to consider the amount of money sloshing around the world right now – China’s $2.2 trillion in reserves, India’s $285 billion in reserves, all of the money in central banks throughout the Middle East,” said Martin Hutchinson, a contributing editor for Money Morning and a veteran banker with more than two decades experience in the international marketplace. “If all of the serious money charges into gold and gold really gets going, you’ll see a tremendous spike in prices.”
Concludes Hutchinson: “I believe the price of gold will hit $2,000 an ounce next year.”
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Such steep run-ups have happened before. From 1978 to 1980, for instance, gold soared from $185 an ounce to $850 an ounce, Hutchinson recalls. Interest rates were about 10% at that time. Credit is much easier to get today.
“Right now, the cost of borrowing money and investing in gold is virtually zero,” Hutchinson said.
How Global Demand Will Drive Gold to $2,000
Indeed, the bull-run in gold is already well underway, and it’s picking up steam.
Prices actually began their most recent rally when the International Monetary Fund (IMF) earlier this month revealed that it sold 200 metric tons of gold to the Reserve Bank of India (RBI) from Oct. 19 to Oct. 30.
The RBI paid $6.7 billion for the 200 metric tons of the yellow metal – the equivalent of about 8% of the world’s annual mine production.
The move surprised many analysts, as India for the past 15 years had largely neglected its gold reserves.
India’s gold holdings peaked at 20% of its foreign exchange reserves – all the way back in 1994. Since that time, India’s gold holdings had fallen:
Indeed, prior to the central bank purchase, India’s gold holdings had dropped to just 3.6% of the nation’s estimated $285.5 billion in foreign reserves.
Little wonder that last month’s gold purchase nearly doubled India’s holdings, which now stand at 558 metric tons, or 6.2% of the nation’s forex reserves.
India’s gold holdings as a percentage of foreign reserves are now higher than even China’s. The People’s Bank of China (BOC) holds about 1,054 metric tons of gold, equal to roughly 2% of its $2.3 trillion in foreign currency reserves.
Asia’s third-largest economy now has the world’s 10th-largest gold reserve, behind Russia, which has about 568 metric tons.
“Our Reserve Bank decided to buy some gold. I think about 400 tonnes. That’s normally something we do from time to time. The IMF wanted to sell gold and we wanted to buy gold,” Pranab Mukherjee, India’s finance minister, said in an interview with the Financial Times.
However, analysts have been far less flippant about the purchase.
Timothy Green, the author of “The Ages of Gold,” described India’s purchase to Bloomberg News as “the biggest single central-bank purchase that we know about for at least 30 years in such a short period.”
“The only comparable event was the U.S.’s steady purchases in the 1930s and 1940s,” he said.
Analysts believe India’s highly publicized purchase – which was made when prices were near record highs – will spawn a chain reaction in which other countries and investors ramp up their gold purchases.
“This is a landmark trade,” Jonathan Spall, a director at Barclays Capital (NYSE ADR: BCS) and a gold specialist, told the FT. “Central banks are conservative institutions and India’s move is a sign for other central banks and sovereign wealth funds that were contemplating buying gold.”
The IMF said in September that it would sell 403.3 metric tons of the metal to shore up its finances and increase its ability to lend at reduced rates to low-income countries.
And with 203.3 metric tons still on sale at the IMF, don’t be surprised if China decides to bulk up on gold, too. China, the world’s sixth-largest holder of gold, has increased its yellow-metal reserves by 76% since 2003. But the 1,054 metric tons it now holds is equal in value to just 2% of its world-record $2.3 trillion in total reserves.
“It is but a matter of time until China and the IMF announce much of the same,” Dennis Gartman, an economist and the editor of The Gartman Letter, told Bloomberg.
Worldwide demand for gold is clearly on the upswing. However, just as that’s happening, supply and production of the precious metal are falling.
Annual worldwide mine production of gold has decreased by nearly 8% since 2001, even as the price of gold has tripled.
Meanwhile, investment demand for gold remained very strong – surging 46% in the second quarter of 2009 from a year ago, according to the World Gold Council.
“Everyone who says that gold will hit $2,000 in five years is wrong,” said Money Morning’s Hutchinson. “It will be back down in 5 years. If it’s going to $2,000 it will get there next year.”
“It will turn around when [central banks] start taking monetary policy seriously, and they won’t do that in a hurry,” he added. “Gold’s bull run is a bubble, just like all the other bubbles. Except this is more of a bang than a bubble, because it’s taking place so quickly.”
Four Ways to Play Gold
1. Market Vectors Gold Miners ETF (NYSE: GDX): Gold miners benefit disproportionately from a rise in the price of gold, because their production costs are fixed. This means that miners are a more-leveraged way to play gold than the metal itself, particularly since surging speculative demand can increase mining companies’ Price/Earnings (P/E) ratios.
2. SPDR Gold Shares ETF (NYSE: GLD): GLD holds more than 1,000 ounces of gold, and has a market capitalization of $39 billion. As an investment, GLD is more convenient than buying gold bars directly. The fund’s share price fluctuates in concert with the price of gold.
3. Barrick Gold Corp. (NYSE: ABX): Barrick is the largest and financially strongest gold producer, with a market capitalization of $43 billion, reserves of 124.6 million ounces of gold (plus copper and silver), and operations in North America, South America, Australasia and Africa.
4. Yamana Gold Inc. (NYSE: AUY): A growing gold producer with a $6.8 billion market capitalization that made an unexpectedly good profit in the fourth quarter of 2008, Yamana is expanding both production and reserves (currently 19.4 million ounces) with operations in Canada and Latin America. Its expansion magnifies the likely potential benefit from an increase in gold prices.
This article has been republished from Money Morning. You can also view this article at Money Morning, an investment news and analysis site.