Asked John: "What's happening to gold prices? Why are they dropping?"
For an answer, I speed-dialed Real Asset Returns Editor Peter Krauth—our resident expert on mining and precious metals.
Peter is based in Canada, which keeps him close to the natural-resource companies that proliferate north of the border. He gave me a detailed and insightful answer to John M.'s question.
And he recommended three ways to profit—including an ETF he says is perfect for first-time gold investors.
To explain what's happened with the "yellow metal"—and to project where gold prices will go next—Peter invented a pricing theory that he christened the "Golden Staircase."
"The bottom line, Bill, is that the price of gold has simply entered a consolidation phase—much like it has done numerous times since it entered this secular bull market back in 2001," he told me.
Gold futures were at $1,662.40 an ounce yesterday—well off the yellow metal's high. Here's why.
"If you think back, when gold hit its all-time high of $1,900 last August, we were in the midst of wild speculation that the U.S. government wouldn't resolve its debt-ceiling crisis," Peter explained. "A deal in Congress was reached in time, but Standard & Poor's went on to downgrade the nation's credit rating for the first time in history. Since then, there's been considerable apathy towards gold by the general investing public, pushing its price down about 13%. What's more, government-calculated inflation looks benign, taking away from gold's luster."
And here's where it gets interesting.
Gold Prices, Inflation and the "Golden Staircase"
You see, as we've detailed to you a number of times, inflation is much, much worse than Washington would have us believe.
The consumer price index (CPI)—the "official" gauge of U.S. inflation, fell to 2.7% in March. But the American Institute for Economic Research (AIER) says everyday prices—the ones that matter most to working Americans—are up a good 8% over the past year.
"Don't be fooled by the "official' numbers," Peter said. "What this means is that the "real' rate of interest (the interest rate you can earn on the safest investment minus inflation) is down around negative 3%. That scenario has typically kept gold in a bull market. That's why I still expect that we'll see $2,000 gold by late this year or early 2013."
To forecast the timing of that rebound, Peter invoked his "Golden Staircase" theory.
"Since the beginning of gold's secular bull, the "Golden Staircase" has demonstrated that it typically takes 12 to 18 months for gold to establish a new price high once it retreats from a strong run-up. Eight months have already passed since gold reached $1,900. The "Golden Staircase" theory tells us that it will take between four and 10 months to see new highs."
Here are three ways to position your portfolio to profit from this rebound:
- If you're a newcomer to the gold market—or you are somewhat risk-averse—Peter suggests the physically backed Sprott Physical Gold Trust ETV (NYSE: PHYS).
- If you're game for somewhat more leverage, Peter likes Newmont Mining Corp. (NYSE: NEM). It's currently yielding 3%, is stable and well-diversified, and its dividend is linked to the price of gold, Peter said.
- If maximum profits are your goal, Peter's favorite play—and his personal pick for the Private Briefing report "The Five Stocks You Have to Own in 2012"—is Sandstorm Gold Ltd. (TSXV: SSL). This streaming-gold company is the riskiest of the three. But it's up 39% since Peter recommended it, and forecasts call for years of rapid growth.