Five Reasons to Go for Gold


"Almost two years ago, Alexander Green showed us six reasons why we should be investing in gold. Five of those are. . .true today. . ."

As you know, I'm very bearish on gold. But even though I'm bearish, it doesn't mean that I don't believe gold shouldn't part of a diversified portfolio.

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.
  1. 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.
  2. 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.
  3. 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.)
  4. Supply constraints. Around the world, discovery rates are falling. Mines are being depleted and mining companies are producing lower-grade base metals.
  5. 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 no secret that gold mining stocks rise and fall with the performance of gold. The market is pricing in the future profit potential of these companies.

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 thinků

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.

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