Will Big Money Interest Propel Gold over Its Final Hurdle?

Bloomberg declares:

Gold Soars to Highest Since July.

A Wall Street Journal headline proclaims:

Gold is Flirting with $1,000, Again; ‘There’s No Sign of the Market Tiring.’

On Wednesday, gold surged another $30 an ounce, surpassing $930 and now, the mainstream media is getting on board in a big way.

We can spend all day debating whether this is the time gold runs back to $1,000 and beyond, or whether this is just another short-lived bounce which could run out of steam at any moment. Frankly, the exceptional volatility of the gold market has taught me that only time will tell.

What I can tell you is that there has recently been a change in gold - a dramatic change -at least the perception of gold. This change could set gold and gold stocks on a long march higher, yet, the mainstream media have completely glossed over it. Let me explain.

Gold Goes Big

You see, gold’s a funny thing. It elicits such an emotional response. Gold has had a pretty volatile year. In 2007, the yellow metal started attracting a lot of attention when it passed the highs set in the early 80s and has been up and down since, although lately, it has had more ups than downs. Despite all the recent attention, we’re right back where we were a year ago, when gold passed the $900 mark.

Whether you’re an all out “gold bug” who has been waiting a long time for this run, you question the value of gold because it has very little industrial use (ala Warren Buffett), or somewhere in between, you’ve got to take a look at what has happened to gold in the past few weeks.

But here’s the thing, this time around there’s interest from some very big money investors, as it is now considering gold to be a viable investment again. It’s not just the hyperactive, hot money hedge funds batting around gold anymore. Now pension funds, mutual funds, and other institutional investors are betting on gold – in a big way.

That is the big difference this time around. The big money interest hasn’t been there for decades, and it looks like that’s quickly starting to change.

Big Money Bets on Gold

Unprecedented sums of money have been pouring into gold in the past few months. While many funds are licking their wounds from the recent downturn and facing ongoing redemptions, some still have money. Those that do are at least putting some of it, into gold.

Just look at the recent money, which has been put into gold companies across the board. They’re all getting new cash. Major miners looking for extra cash to fund takeovers, exploration, and mine development, along with small gold companies looking for one more financing to put themselves into production, are all getting it. There’s money out there for gold.

For instance, Newmont Mining (NYSE:NEM) is expecting at least $1.7 billion (or more depending on the final terms of agreement) in new cash in its coffers. The cash infusion will come from the sale of stock and convertible notes. That’s billion – with a ‘B.’

Leading the charge in putting this financing together was Citigroup (C), J.P. Morgan (JPM), and the Bank of Montreal (BMO). They’re the big money, and except for BMO, they wouldn’t have given gold the time of day when private equity players were chasing after real estate, Chinese companies, and other “hot” sectors over the past few years.

Of course, it’s not just one big deal though. It’s lots of them. Industrials may be going under because they can’t get financing, but when it comes to gold companies, suddenly, there appears to be plenty of available money. Over the past few months, there have been a slew of financings of gold companies. Yamana (NYSE:AUY), Agnico-Eagle (NYSE:AEM), and Kinross Gold (NYSE:KGC), combined have attracted more than $800 million in new money.

Even gold companies, which were pretty much left for dead during the credit crunch are getting the cash they need. Shares of Osisko Mining [TSX:OSK] dropped well below $2 per share in November amid concerns the company wouldn’t be able to get the cash necessary to move forward with its prospective gold mine. Three months later, its shares are trading above C$4 after hitting highs of over C$5 per share, and it now has the money it needs. NovaGold (AMEX:NG) went through a similar ordeal. Its shares dropped all the way to $0.37 only to climb back to close at $3.52, on Wednesday.

These are just some of the bigger deals. We could highlight the dozens of smaller deals which are or are about to get some new capital, but you get the point. There’s big money backing gold now. In a way, the whole gold situation may have changed.

A “Frightening” Change

Two weeks ago Peter Munk, the Chairman of Barrick Gold (NYSE:ABX) – the world’s largest gold mining company – identified an “unpleasant and frightening” trend. In an interview with Bloomberg, Munk said:

He has received an increasing number of calls from wealthy investors looking for ways to buy bullion. While that is positive for the metal market, it is a “sad part of a civilized society.”

“That’s not where you want to be, it’s alarming. Do I personally believe gold will break through $1,000? It’s not a question of if; it’s a question of how soon.”

You’ve got to remember that Munk is the chairman and founder of a gold company, so he has a lot of experience in gold. He has access to the inner workings of the gold market, and benefits from rising gold prices, as well.

Despite the potential conflict of interest, he is definitely correct in saying that change has taken place.

What Really Matters About Gold

As long time Prosperity Dispatch readers know, I hate talking about gold. When it comes to gold, everyone has an opinion, and it’s usually a very strong one, as there’s very little middle ground when it comes to gold.

Just to be clear though, I’m not a gold bug. I’m not about to predict gold is going to $1,000 before it goes to $800, as there are just too many variables driving gold lately. I think a world with $200 gold is a much better place to live in than a world with $2,000 gold, but the recent big money push into gold could mark a significant change in the prospects for gold.

In the end, it all comes down to whatever the markets believe. Perception is reality, and a lot of money is betting gold will be perceived as more dearly down the road, whether deflation or inflation, wins out.

Over the past few months, deflation vs. inflation has been a popular subject of debate. While $60 trillion of wealth has been wiped out in this downturn, central banks are going all out to print enough new money to prevent the inevitable deflationary effects of the losses. And as we’ve noted before, all speculative bubble-booms end in deflation.

That doesn’t matter now. The current theory is gold will win either way - deflation or inflation, it doesn’t matter. Gold wins during inflation because it’s a store of value, and it wins in deflation as central banks debase their currency. As a result, there’s demand from both the inflation and deflation camps. In the end, the perception of value is what really matters for gold (and every other financial asset for that matter).

For decades, the big money refused to view gold as anything other than something horded by conspiracy theorists. The lack of big money interest was a huge hurdle for gold. Now, with the billions of dollars headed into gold from leading U.S. institutions, it appears the hurdle may have finally been passed.

Disclosure: None

Comments

[Roger Knights:]

Good article. I've noted the trend in financing of gold companies too. It’s a powerful “fundamental” in gold’s favor that big money is silently putting down its bets. I think awareness of this activity is what is stiffening the spines of the mainstream analysts from big-name companies who have been predicting much higher gold prices, something they’d previously avoided doing.

"it wins in deflation as central banks debase their currency"
Or if the Euro collapses. That’s something that could happen sooner than people think--maybe within three months. If such a prospect caused a trivial 5% of European stock and bond investments to move into gold, its price could jump by 50% in a week, the Indian scrap supply notwithstanding. Critics of gold tend to completely ignore the European angle, focusing entirely on whether there will be inflation or deflation in the US. That's too blinkered a view.

(The ironic thing is that many gold bugs, made cynical by gold's many false starts, will jump off the train just as it finally achieves lift-off (to mangle a metaphor).)

BTW, there's an apparent typo: "junior" should be inserted as the second word in this phrase:
"Even gold companies, which were pretty much left for dead "

Feb 13 07:06 AM

[ROLEX18:]

It's wrong perception of pikers, who think that BIG MONEY will save them, smart money never invest on the top and they are more than happy not to participate in the last moves even in significant moves in Gold.
When GC was 850$ in the 80's you couldn't find some wealthy family who were invested in GC, that's why when it crashed only speculators lost, not elite.
Same as now, wealthy investors preserve their capital, they don't gamble in GC stocks or GC itself, they can have 1-2% in it, but not more, that's why rich people get richer and you are always the loser.
Sell Gold.

Feb 13 07:40 AM

[5142152-337:]

Lots of good comments. The CNBC touters (I replaced the word that starts with a "w") don't, and won't, talk about gold. They don't want you to consider it, period. When gold goes up 30 or 40 bucks all they do is throw up a chart and say "gold is up", and that is it! There will come a time when all they talk about is gold. That day is the day you SELL, and SELL IT ALL! This is a gold bug telling you this.

Feb 13 09:07 AM

[yellowhoard:]

Good article. I could not agree more.

Feb 13 09:22 AM

[Socialism c...:]

"I think a world with $200 gold is a much better place to live in than a world with $2,000 gold"

Why? Give us some reasons for your opinion!!

Feb 13 01:45 PM

[TRUEjoe4U:]

While all the majors producers will show handsome gains as gold climbs higher and higher, of which there is ample evidence that the tide is turning and prognosticated all over by regular talking heads on and gold bugs, I will suggest one should look at up and coming juniors and exploration companies.
My three outstanding prospects are : FFGO.PK, HGLC.PK, FPRT.PK (renamed "Hurasu")
Do some due diligence, I am sure you will not regret it.

ALLtheBEST, JC

Feb 13 01:55 PM

[Robert Cassidy:]

Gold is contended to be "volatile".....really ? 50 years ago , I bought a new VW for the cash equivalent of one kilo of gold ( $1000- ) ...today thast same kilo will also buy a new VW ....with change to spare .....The $1000- might buy you a set of tires ....Face the reality ....It is currency that is "volatile" and endlessly sliding downwards

Feb 13 07:48 PM

[MystixX:]

Oh I definitely didn't regret it, gave me a real good chuckle, lol, it's the Bernie Madoff of the mining industry!

I wonder if the owners are failed soap opera writers - gotta give them credit for all those constant press releases and ever new excuses for not paying anything back to the shareholders!


On Feb 13 01:55 PM TRUEjoe4U wrote:

> My three outstanding prospects are : FFGO.PK, HGLC.PK, FPRT.PK (renamed
> "Hurasu")
> Do some due diligence, I am sure you will not regret it.
>
> ALLtheBEST, JC
>
>

Feb 13 08:58 PM

[James Wilson:]

Exactly how do you cook gold ? How many Carbs does gold have?


On Feb 13 07:06 AM Roger Knights wrote:

> Good article. I've noted the trend in financing of gold companies
> too. It’s a powerful “fundamental” in gold’s favor that big money
> is silently putting down its bets. I think awareness of this activity
> is what is stiffening the spines of the mainstream analysts from
> big-name companies who have been predicting much higher gold prices,
> something they’d previously avoided doing.
>
> "it wins in deflation as central banks debase their currency"
> Or if the Euro collapses. That’s something that could happen sooner
> than people think--maybe within three months. If such a prospect
> caused a trivial 5% of European stock and bond investments to move
> into gold, its price could jump by 50% in a week, the Indian scrap
> supply notwithstanding. Critics of gold tend to completely ignore
> the European angle, focusing entirely on whether there will be inflation
> or deflation in the US. That's too blinkered a view.
>
> (The ironic thing is that many gold bugs, made cynical by gold's
> many false starts, will jump off the train just as it finally achieves
> lift-off (to mangle a metaphor).)
>
> BTW, there's an apparent typo: "junior" should be inserted as the
> second word in this phrase:
> "Even gold companies, which were pretty much left for dead "
>

Feb 14 12:51 AM

[James Wilson:]

Gold-- is dug out of the ground melted down and put in a bank with guards around it.
Sledom used for anything other than jewlery which is the favorite target of criminals.

If there is a gloable depression how would you turn gold ingots into coins if you were not robbed.

Who would have change ?

Feb 14 12:55 AM

[Kaleb22:]

It is nice to read an article with a unique perspective now and again. Reporting the facts and letting people decided what to do from there. Good work!

Feb 14 02:39 PM

[PeteK:]

Mr. Mickey,
Can you find out what ABX & KGC are doing with this company called MDW ? Both are putting money into this MDW in seperate gold mines
projects. Kind of like a partnership.

Feb 14 04:33 PM

[PeteK:]

Sardines are cheap and sure can
keep them for long long time.
Getting gold is grandma's idea.
It is a very good idea.
She's been through time.

Feb 15 03:35 AM

[Goldbug Phil:]

Who would have change? The people who has silver coins would have change, and I'll accept change in silver. You people who think that you cannot eat gold are mistaken. Remember that you cannot eat a dollar bill either. I'd much rather hold onto gold than a paper dollar when the shit hits the fan because I can always find people in other countries that want my gold Eagles for some carbs.

On Feb 14 12:55 AM James Wilson wrote:

> Gold-- is dug out of the ground melted down and put in a bank with
> guards around it.
> Sledom used for anything other than jewlery which is the favorite
> target of criminals.
>
> If there is a gloable depression how would you turn gold ingots into
> coins if you were not robbed.
>
> Who would have change ?

Feb 15 02:24 PM

[sandmanuva:]

I suppose I still struggle with why people want gold. It doesn't serve any real purpose anymore. When was the last time you used gold to buy your groceries, or even a big ticket item like a house? The "gold standard" seems a bit arbitrary. Why not the silver standard or the copper standard or platinum? If people have less dollars to exchange for a bar of gold, won't it be worth less than it is today? The run-up seems fueled by an uneducated "flock to security". It will be interesting to see what happens if people figure out gold is not intrinsically more secure than many other metals. It seems very similar to the Dot-Com or Housing bubble. Things are worth more than their intrinsic value, until they suddenly aren't.

Feb 17 10:51 AM

[fran:]

you mix it with shares of green energy, add some pork belly futures, top it off with futures shares of WTI. have "cocoa" and "sugar" futures for desert.







On Feb 14 12:51 AM James Wilson wrote:

> Exactly how do you cook gold ? How many Carbs does gold have?

Feb 22 07:42 PM

[huskerbob:]

I guess I have trouble understanding why people buy equities. When was the last time you used share certificates to buy groceries. Boy, if the apocalypse comes they will be worthless because you can't eat eat them.
If you don't understand the value of gold, you may be wondering why central banks hold so much of it. You may be suprised to find that phrases like "gold standard" are not in the least bit arbitrary. You may want to do some research and discover why gold has more intrinsic value than, say, tin. Maybe do some further research into what money is and why the dollar has declined by 95% since we ended the "gold standard".
Aren't you in any way curious about what's happen to the global economy right now? Gold is an intrinsic part of the story of how we have reached this point. Do yourself a favor and spend the effort it would take to learn a little bit about those gold and dollars you use every day.
"It will be interesting to see what happens" if you educate yourself a little bit.

Feb 28 04:44 PM