The Real Reason Why Gold is Rising
Source: Investor's Daily Edge, Jon Herring (3/27/09)
"Can you think of a safer investment than buying cash at a discount and getting gold for free?"
If the estimates for this year’s production are on target, mining output will have fallen more than 10% since the bull market began. The world's richest deposits are becoming depleted; and, in spite of $18 billion spent on exploration in the last five years, new discoveries have been smaller and of a lower quality.
The financial crisis is only making things worse. Hundreds of mines have been shuttered in the past year, and this says nothing of the exploration projects that have been mothballed.
But this is not the only force working to reduce supply. . .
Besides scrap gold and individuals selling their holdings into the market, the other primary source of supply are sales of bullion from the holdings of central banks. For many years, central bank sales and leasing have accounted for about 1,500 metric tons per year. This has bridged a serious supply gap and helped keep a lid on rising gold prices. I won’t go into the criminal elements of manipulation and suppression, but there is a light at the end of the tunnel.
The central banks are running out of ammo (gold). Considering that the world’s entire gold production in 2008 amounted to only 2,400 metric tons, the potential impact of central banks going from selling 1,500 metric tons to becoming net buyers can’t be overstated.
If you want to capitalize on these trends, start by holding the physical metal. Then consider the top-tier mining companies, which are making money hand over fist with gold prices near record highs. They will leverage any further gains in the metal several times over.
But the real fortunes will be made by investors in the smaller companies. A much better risk to reward is to identify the second- and third-tier miners that are already producing gold and silver at a low cost basis. These companies are targets for the cash-rich majors. Recently, a number of these companies were selling for less than the cash on the books. Can you think of a safer investment than buying cash at a discount and getting gold for free?