Almost two years ago, Alexander Green showed us six reasons why we should be investing in gold. Five of those are as true today as they were then.
- The U.S. dollar is weakening. That makes the precious metal, typically denominated in dollars, cheaper to buy in other currencies. (Euro-denominated investors think gold still looks cheap.) Gold traditionally rallies as the dollar falls.
- Inflation fears. Only a few months ago, Bernanke was openly fretting about the possibility of higher inflation - and saying the Fed's bias was toward tightening rates. Yet he has cut rates dramatically to lessen the credit crunch resulting from a meltdown in mortgage-based securities. Needless to say, the Fed's action was inflationary. And gold is an excellent inflation hedge.
- Emergence of China and India. A flourishing middle class in both emerging giants is increasing the demand for gold. (Jewelry fabrication was up more than 50% in India alone last year.)
- Supply constraints. Around the world, discovery rates are falling. Mines are being depleted and mining companies are producing lower-grade base metals.
- Geopolitical instability. There are plenty of hotspots around the world today. But gold is viewed as a safe haven during times of political or economic calamity.
It's not uncommon to see a gold producer stock plummet in price after a significant price plunge. However, what many don't realize is that these fluctuations have less bearing on the profit potential than you would think…
Gold has to come down a long way to make producers unprofitable!
The cost of producing gold is about $317 an ounce. The price of gold as I write this is just under $890. That's a profit margin of around $573 for companies with active mines - about 180% of their costs. Even if gold plummets to $700 an ounce, these companies are still making 120% of their costs.
That's a subtle difference between profitable and really profitable - and it's also a huge moat of safety for these companies pumping what really glitters onto the open market.