Four Ways to Invest in Bottom-Basement Gold 22 comments
Money Morning
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By Mike Caggeso
Gold hit two historic milestones in 2008.
First, in early March, the “yellow metal” hit its all-time high of $1,030 an ounce.
Just three months later, the price of gold for December delivery had plummeted to $681 an ounce, a 21-month low and 33.9% drop from its record high.
Most gold bugs were equal parts puzzled and brokenhearted. The world’s stock markets tanked, as did some of its biggest economies. In such an environment, they thought, gold should have risen. After all, gold is widely considered to be a safe-haven investment when everything else is spiraling south.
However, Money Morning Contributing Editor Martin Hutchinson understood perfectly what other investors did not.
“Gold is not a safe haven against recession,” said Hutchinson. “It’s a safe haven against inflation.”
In the past year, commodities prices skyrocketed – across the board. That was especially true of oil, which hit a record high $147 a barrel. Corn, wheat, and soybeans all hit record highs, as well.
That price escalation tightened household and corporate budgets, and was a primary reason why the U.S. economy posted a gross-domestic product (GDP) decline of 0.3%. With that negative growth, the third quarter was the beginning of what many experts believe will be the nation’s first recession since 2001.
However, the inflation epidemic has waned significantly, as global demand for raw materials has plummeted. Price for such staple foods as corn, soybeans and wheat have all come down from their record highs – in near-lockstep fashion.
Corn futures are down nearly 50% from their summer high of $8 per bushel. The same is true of soybeans and wheat, with each having lost roughly half their value. In fact, wheat hit a 16-month low in mid-October.
As most of us noticed, gas prices have fallen 48% from their July 17 high of $4.114 a gallon.
And not coincidentally, gold has fallen 22% in that same time frame.
However, this report examines the pending commodities rebound – a projected slow-and-steady increase in commodity prices that will reverse the breakneck plunge below fair value that commodities have experienced for much of this year.
Our objective now: To chart the expected path of gold prices in the New Year.
This report also reveals another wild card inflationary indicator that Hutchinson believes will carry gold prices to $1,500 an ounce by the end of 2009.
Two Catalysts For Gold’s Climb
The U.S. Department of Agriculture’s Oct. 10 Crop Production Report said acreage for a handful of staple food commodities has shrunk:
- Corn acreage fell 1.2%.
- Soybean acreage dropped 1.4%.
- Canola acreage dropped 1.9%.
- Sunflower acreage shrank 0.8%.
- And acreage of dry edible beans fell 0.7%.
That naturally translates to higher prices because it squeezes the supply of the particular commodity. And it does so at a time when demand continues to escalate from populations in China, India and Latin America. And higher prices equal inflation.
But Hutchinson – who correctly predicted this last run-up in gold prices – says there’s another catalyst that’s right now inherent in the U.S. economy that could help vault gold prices to $1,500 an ounce by the end of 2009. And it has to do with the much-ballyhooed $700 billion rescue plan.
The philosophy behind the rescue plan is elegantly simple: By providing a portion of the $700 billion to foundering U.S banks, the Treasury Department believed it could provide banks with badly needed capital, and get them to start lending money once again – jump-starting the economy in the process.
Since September 2007, U.S. Federal Reserve policymakers have cut the benchmark Federal Funds target rate nine times – from 5.25% down to the current 1.0% rate – to increase bank-to-bank lending and bank-to-consumer lending.
“The government is pumping money in so many banks, and that money has to come out somewhere,” Hutchinson said.
Right now, banks aren’t boosting lending. Instead, they are using the cash to finance buyouts of other banks. Even so, that money will “come out” into the economy in the form of higher stock prices for banks. That will make consumer/investors wealthier, and could make them more confident in the economy. If they’re more confident, they will spend. As that happens, food prices should begin ticking upward, adding another set of thrusters to gold prices.
“Everybody thinks that because we’re having a horrible recession, we’re not going to have inflation. I think that’s probably wrong,” Hutchinson said. “I think gold has quite good hidden-store value.”
As gold prices increase, count on more investors leaving the sidelines to invest, too, causing the surge in gold prices to accelerate and steepen.
“As gold goes up, it gets more popular and investors start piling into it,” Hutchinson said.
And if gold gets anywhere near the $1,500 mark, sell. Prices that high will likely fall back or plateau as the Federal Reserve begins raising interest rates and strengthening the U.S. dollar, Hutchinson said.
Four Ways to Play Bottom-Basement Gold
Before we get too far ahead of ourselves, let’s first look at five ways to play bargain-basement gold prices.
The SPDR Gold Trust ETF (GLD) – formerly StreetTracks Gold – is a fund whose shares are intended to parallel the movement of gold prices. Since gold prices started falling along with gas prices, SPDR Gold Trust has stayed within a 0.5% margin of gold prices. This exchange-traded fund (ETF) eliminates any investor concern over storage and delivery while giving them exactly what they want – gold.
Toronto-based Barrick Gold Corp. (ABX) has 27 mines, mostly in North America and South America, and is developing or exploring 11 more. With a market cap of more than $20 billion, it has considerably more liquidity than most mining companies. Barrick is primarily a gold miner, but it also has copper and zinc mining operations. As far as investors are concerned, there are two ways to look at that: It’s not a pure play, per se, but then again, this is a company stock, not a bar of bullion. Also, having operations other than gold can help stabilize the company’s bottom line in case problems arise at a gold mine.
Denver-based Newmont Mining Corp. (NEM) is primarily a gold producer with operations in the United States, Australia, Peru, Indonesia, Canada, New Zealand and Mexico. Its reserves are hovering around 86.5 million ounces. Like Barrick, this is a mining stock play, and is subject to market swings – as well as fluctuations in gold prices. That can be a significant tailwind, especially if you believe the stock market has bottomed out or is close to doing so. Hutchinson – forever a value-oriented investor – warned that Newmont might be a little too pricey now. Investors may want to wait for the company’s stock price to settle before getting in.
Hutchinson thinks the best value for a gold mining stock can be found in Yamana Gold Inc. (AUY), another Toronto-based company that’s small now, but has rapidly expanding production.
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This article has 22 comments:
> * Corn acreage fell 1.2%.
> * Soybean acreage dropped 1.4%.
> * Canola acreage dropped 1.9%.
> * Sunflower acreage shrank 0.8%.
> * And acreage of dry edible beans fell 0.7%.
>That naturally translates to higher prices because it squeezes the supply of the
> particular commodity.
Nope. You forget about demand part of the market. Prices fell because demand fell. If demand to fall more, reduced supply wouldn't raise prices.
The investment seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the AMEX Gold Miners index.
The United States Treasury and the Federal Reserve are throwing a trillion dollars, more or less, into the banking system. And, there’s surely much more to come.
It’s not only the U.S. monetary authorities pumping up the money supply. Their counterparts in every major economy - including the United Kingdom and the Euro zone, China, Russia, Japan and on and on - are doing likewise.
We have never - in the history of money - seen such an expansion in its supply without, after a period of time, a rapid deterioration in its value, in other words, without a rapid increase in the overall price level. More than any other factor influencing the gold market, it is the inevitable rise in price inflation that will propel gold skyward in the next few years.
The deflationists and inflationists are both right.
Deflation today, inflation tomorrow.
On Nov 17 10:02 AM lightstream wrote:
> Barrick is up there, almost on top, as one of the most corrupt and
> sinister corporate entities on the planet, culpable on any number
> of levels for much of the current malaise. But what more would anyone
> expect from a crime syndicate? Although it seems likely that eventually
> metals will have to break out--although who knows what measures will
> be in play by then to keep the public from aggregating wealth--any
> time I see these Internet posts about gold ETFS or other stock opportunities,
> I look for the word Barrick to get a bead on the baseline integrity
> of the author.
Can you please explain your statement below, using the following statistics:
1) Source of funds added to money supply
2) Actual money supply growth, including M1 to M3
3) Compare the current banking crisis to Norway and Finland's.
Thx,
Alex
On Nov 17 10:37 AM Jeffrey Nichols wrote:
> The following is from my November 12th post on NicholsOnGold.com:
>
>
> The United States Treasury and the Federal Reserve are throwing a
> trillion dollars, more or less, into the banking system. And, there’s
> surely much more to come.
>
> It’s not only the U.S. monetary authorities pumping up the money
> supply. Their counterparts in every major economy - including the
> United Kingdom and the Euro zone, China, Russia, Japan and on and
> on - are doing likewise.
>
> We have never - in the history of money - seen such an expansion
> in its supply without, after a period of time, a rapid deterioration
> in its value, in other words, without a rapid increase in the overall
> price level. More than any other factor influencing the gold market,
> it is the inevitable rise in price inflation that will propel gold
> skyward in the next few years.
>
AUY is the best value now but check out TRE as my sleeper pick. It is run by Jim Sinclair.
1. Gold is ‘real money’, fiat currencies are not. This is because at any point in time gold satisfies all components of the definition of ‘money’ where as a ‘store of value’ that definition in part means that ‘money’ must be able to be reliably retrieved and ‘predictably useful’ when retrieved. Fiat currencies do not meet this test as ‘money’.
2. At any point in time the U.S. $ is a measure of the price of gold, not a measure of its value.
3. At any point in time Gold’s value needs to be thought about in the context of its then current and prospective purchasing power, having regard to prevailing and prospective macro-economic conditions.
4. Whether the future economic circumstance is inflationary or deflationary some gold is a good thing to own as a ‘safe haven holding’.
Check out the article:
www.stockresearchporta.../
Someone should also point out that it is an imperfect inflation hedge. For example, exactly how much should gold sell for if long term inflationary expectations are 3%? How about at 6%? 5%? If expectations change from 4% to 5%, how much should gold go up? There is no way to answer those questions. Instead, the commodity is emotion-driven and with no fundamentals such as supply, demand, or earnings, the price is unpredictable.
Even if you somehow manage to guess the correct future inflation rate for the next five years, you could still lose if buyers in 5 years expect lower inflation ahead. You could also lose in an environment where common stocks are yielding 7% and bonds or preferreds are yielding 10%, like this environment!
I will conclude with the following question: What is more likely, Transocean (RIG) being worth more in 5 years or gold being worth more in 5 years? Can you support your answer?
GSEs so far: $4.784 Trillion. Think what that inflation of the money supply will do to prices, causing Gold to skyrocket.
From the dawn of time, before any alphabet could express its beauty, man has worked with gold...and hence...its timely, obfuscatory attraction in good times and bad.
If u buy it in coins from a dealer, you have a great chance of paying way over spot. If you buy it in a fund, it's murkier. Yet it still attracts.
Factor this in...and while not an explanation, no other metal belies the current pulse of the times.