Investors are starting to realize that gold is a storehouse of value and a safe haven in times of turmoil. Gold's price has risen because of the abuse and mismanagement of our monetary and currency systems—throughout history, gold has always shone the brightest when trust breaks down, confidence falls and fear climbs.
Latest demand statistics from the World Gold Council:
- Total gold demand in Q210 rose by 36% to 1,050 tons;
- Investment demand posted a rise of 118% to 534.4; and
- With the return of demand for consumer electronics, industrial demand grew by 14% to 107.2 tons, compared to Q209
"In 2000, gold made its $260/oz. low; in January 2000, the Dow was 10,900As I write this, the Dow:Gold Ratio is 10,447 ÷ $1250 = 8.35/oz.
10,900 ÷ $260/oz. = 41.9 oz. to buy the Dow
Today, at 10,447 DJII and $1,250 gold, it's 8.53/oz. to buy the Dow."
After being the best-performing major asset of the last decade, is the price of gold going to continue higher?
On January 21, 1980, gold closed at US$850/oz. According to Adam Hamilton of Zeal Intelligence, who uses the Consumer Price Index (CPI) to recast historical gold prices into today's inflated dollars. The gold price today would have to be US$2358 to match gold's nominal high in 1980. So, according to Mr. Hamilton's figures, we aren't even close to receiving full value on our gold. And not surprising—Tier One gold producers aren't either.
According to Michael Curran, an RBC Dominion Securities analyst, the average discounted gold price among North American Tier 1 producers is $91/oz.—gold is currently trading at US$1250/oz.
There presently exists reasonable, sound and, at least as far as I'm concerned, convincing arguments that both gold and gold stocks—or at least Tier one producers—are undervalued. Considering the seasonally strong period for gold and gold stocks is right around the corner, they might be even more undervalued than we think.
Current head of the Federal Reserve, Ben Bernanke, is an economist and a student of the Great Depression. Bernanke thinks he knows how to turn deflation into inflation—throw massive amounts of cash at the economy and don't worry about the dollar's value, not yet anyway. Just get all that money out there and deflation will disappear; in its place will be very much welcomed (by the government, anyway) inflation.
And this is exactly what is happening today, massive cash injections to stimulate almost every sector of the economy.
At this point in the game, it's interesting to look back in time a bit and realize how Ben "Helicopter" Bernanke got his nickname. He once made light of the fact that to combat deflation, if worse came to worst, he could always throw money out of a helicopter. What he was getting at was, if previous efforts had failed—and they mostly have—at best, all he can claim is 'it could be worse' if the American consumer had retrenched, wasn't spending but was saving money (and paying down debt), banks weren't lending and businesses weren't borrowing and growing (creating jobs)—much like conditions today—Bernanke would literally throw money to consumers from a helicopter to get them spending again. All this new money being spent would cause the wanted inflation in a great enough amount to reverse deflation.
"When we talk about the velocity of money, we are speaking of the average frequency a dollar is spent. If nobody is spending money the velocity is zero."
There are a lot of ways the Fed could accomplish this—buying stocks, guaranteeing mortgages—and some of these methods are starting to be employed, with debt relief/forgiveness being on top of the list. The Fed realizes a lot of money is trapped in bank coffers and isn't going to be loaned out to businesses and individuals (instead the banks take the free 0% money from the Fed, leverage it 10:1 and buy U.S. Treasury Bonds at 4% interest). They also understand you can lead a horse to water but can't make him drink (i.e., you can shovel money to consumers; but, until they're comfortable with their debt levels, they'll pay off that debt, and then—and only then—spend.
"The Committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly." -Ben Bernanke, Chairman of the Federal Reserve
The next round of stimulus, and there will be another round, is going to be aimed squarely at consumers—dropping money out of helicopters. Money will begin to flow and circulate through the economy again; it's a matter of when not if. I believe we're heading, over the next few years, to a very inflationary environment.
The real threat facing us today, in my opinion, is the coming rise in prices for all things caused by the ongoing worldwide increase in the monetary base. I'm not sure how long it will take for all the money creation to work its way through the pipeline, but this author definitely believes it's coming. With President Obama promising trillion-dollar deficits for years to come (White House estimates predict the 2010 budget deficit will reach a record $1.47 trillion), the government is borrowing $0.41 of every $1 it spends. Next year's budget deficit is predicted at $1.42 trillion, that's $0.37 of borrowing for every $1 spent), with all exporting countries trying to keep their currencies weak to make their exports competitive and with Bernanke throwing money out of helicopters—once my anticipated inflation starts, it isn't going to stop anytime soon. I believe when investors wake up to this fact we'll see a flood of money—a virtual herd of investors—stampeding into all things gold.
It presently would be very hard to mount an argument against gold being the winning major investment of this decade.
With the price of gold at US$1,250, it's definitely living up to its oft proven history of acting as a safe haven in times of turmoil.
But what happens to our gold investments when "deflation" turns to inflation? Does gold serve us as well in an inflationary environment as it's serving now?
Gold shines brightest in inflationary times. The ongoing deflationary scare could be a buying opportunity for gold, and especially for those undervalued gold company shares. History proves the greatest leverage to a rising gold price is gold mining stocks.
I think gold juniors are going to be the most rewarding and lucrative way to garner the huge rewards from the coming freight train rush to gold. Those golden tracks are being laid now using the world's currencies as ballast—when your cash is trash, your gold is shining.
There will be fierce merger and acquisition (M&A) competition for the juniors with stable safe gold ounces in the ground by producers having to replace their reserves in an extremely competitive environment. There aren't very many decent-sized deposits—those over 2 Moz.—left in politically stable countries.
Monetary and fiscal authorities around the world are setting us up for an inflationary cycle. This will be the ultimate driver of the gold bull market going forward.
Gold and gold stocks should be on every investors radar screen.
Are they on yours?
Richard (Rick) Mills [email protected]
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Richard is host of aheadoftheherd.com and invests in the junior resource sector. His articles have been published on over 200 websites, including: The Wall Street Journal, SafeHaven, Market Oracle, USA Today, National Post, Stockhouse, Casey Research, 24hgold, Vancouver Sun, SilverBearCafe, Infomine, Huffington Post, Mineweb, 321gold, Kitco, Gold-Eagle, The Gold/Energy Reports, Calgary Herald, Resource Investor and Financial Sense.
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