Gold to $3,000?

The Gold Rush of 2009 likely hasn’t come as a complete surprise to too many investors. After all, gold has been proven time and time again to be a “safe haven” investment that rises during uncertain economic times (such as the last two years), and questions about the dollar’s future as the world’s reserve currency (along with other factors placing downward pressure on the greenback) have led many to reconsider their strategic holdings.

But the length and degree of the run-up in gold prices certainly caught a number of investors (myself included) off guard. Brett Arends poses a question I would have laughed at two years ago, but now take quite seriously: is it realistic to think gold could really go to $3,000?

Some gold bugs think it’s a distinct possibility.

Bud Conrad, the chief economist at Casey Research and a noted gold bug, estimates that gold prices could quadruple from current levels, based on long-term macroeconomic trends. Conrad believes a number of these ratios would support gold prices in the $4,000 to $5,000 range.

Peter Schiff is another gold bug, predicting the fallout from the U.S. government’s massive money-printing will send gold quickly through the $2,000 mark and onwards to $3,000.

Former presidential candidate Ron Paul is also bullish on gold even after its recent rally. Believing that government policies will erode the purchasing power of the dollar, Paul recently indicated he believes gold prices could triple, taking values above the $3,000 mark.

But perhaps the biggest gold bug is located halfway around the globe. China, the world’s largest owner of U.S. government debt, may be fearing that its holdings will become worthless, and has begun shifting its holdings into what Greenspan once dubbed “the ultimate source of payment.” China has repealed its restrictions on precious metals ownership this year, and is reportedly considering a ban on the export of gold and silver. If China continues to move away from the U.S. dollar and towards precious metals, the upward pressure on gold prices could be significant.

As Arends points out, valuing gold on fundamentals is an impossible task. Unlike equities, gold generates no earnings. Unlike bonds, the yellow metal pays no coupons, and has no yield to maturity. It is essentially a “perpetual zero coupon bond,” making determinations of relative value a difficult exercise.

ETF Plays on Gold

As gold prices have skyrocketed, gold ETFs have become increasingly popular, experiencing huge cash inflows in recent months. For investors bullish on gold prices, ETFs are an excellent option for gaining quick, cost-efficient exposure.

Here’s a look at three of the more popular gold choices (for a complete rundown of gold ETF options, see our Complete Guide to Gold ETFs)

• SPDR Gold Trust (GLD): The largest and most heavily traded gold ETF, GLD has a market capitalization of more than $19 billion. GLD invests in gold bars and stores the bullion in secure vaults. GLD has gained more than 30% over the last year.

• ETF Securities Physical Swiss Gold Shares (SGOL): SGOL is the latest gold ETF to hit the market, designed for investors who want to invest in physical gold stored outside of the U.S. Because this ETF stores its gold bullion in Swiss vaults, it offers security to those who worry about a repeat of the Gold Confiscation of 1933. SGOL was launched earlier this month, and has already accumulated more than $70 million in assets.

• iShares COMEX Gold Trust (IAU): IAU also seeks to reflect the day-to-day movements of the price of gold bullion. IAU has gained more than 30% in the last year.

In addition to these ETFs, there are also several products that invest in futures contracts on gold, including DGL and UBG.

For investors who think we’re near the end of a gold bubble, there are also ETFs to bet on falling prices. PowerShares offers a short gold ETN (DGZ) as well as a double short gold ETN (DZZ). ProShares also has an UltraShort Gold product (GLL) that offers leveraged inverse exposure to daily changes in gold prices.

Disclosure: No positions at time of writing.

Comments

[doubleguns:]

Gold is going up against all currencies. That indicates it is demand driven and worldwide. A lot of new PM ETF's have came out recently and they need to "stock up" so to speak. Add in the Chinese buying that can only be assumed to increase, and with a HUGE population of potential buyers.

Expect demand to remain high, when the shorts start covering it will be a moon shot for gold.

US/London manipulators are loosing control. Its about time.

If we do get a pull back buy start buying with both hands and 3 checkbooks. .

Sep 17 09:02 AM

[Whippet:]

<<As Arends points out, valuing gold on fundamentals is an impossible task. Unlike equities, gold generates no earnings. Unlike bonds, the yellow metal pays no coupons, and has no yield to maturity. It is essentially a “perpetual zero coupon bond,” making determinations of relative value a difficult exercise.>>

Wow, this is close to the most absurd statement I have ever seen on Seeking Alpha (and that include's Michael Fitzsimmons' articles). Gold is not "valued" as an equity; it is "valued" as money or any other commodity- a function of supply and demand. The fundamentals for gold are the balance sheets of the demand and supply sides, reconciled. I fundamentally analyze gold on a continue rolling basis, as I do with oil, silver, and soft commodities. Mine production peaking? Bullish fundamental. Jewelry demand down? Bearish fundamental.
The dollar also is a "perpetual zero coupon bond." The difference being that God is not continuously diluting the gold supply, and the same cannot be said for Ben.

Sep 17 09:38 AM

[Roger Knights:]

"Gold is not "valued" as an equity; it is "valued" as money or any other commodity- a function of supply and demand. The fundamentals for gold are the balance sheets of the demand and supply sides, reconciled. I fundamentally analyze gold on a continue rolling basis, as I do with oil, silver, and soft commodities. Mine production peaking? Bullish fundamental. Jewelry demand down? Bearish fundamental."

But it is followers of the supply/demand fundamentals like Nadler who have missed the recent rise and predicted a downturn instead. That's because the long-term price of gold is most strongly influenced by the gorillas: the central banks, and secondly (nowadays) by large investors. Their moves are dictated not by "fundamentals" like those that affect other commodities, but by monetary factors that are extremely complex, mixed in with sentiment and trend following. It is ultimately confidence in various forms of fiat vs. gold, and confidence is a form of sentiment, that sets the major trend of the gold price. That's why I say, "In the short run the gold market is a weighing machine, in the long run it is a voting machine."

IOW, if gold goes to, say, $1500 in two years, it won't be because of increased jewelry demand and falling mine production, but almost entirely because of a soft factor like sentiment about the trajectory of fiat and of the world's major economies, plus even more intangible considerations like sentiment about destabilizing international incidents, social unrest, etc.

Sep 17 11:43 AM

[Roger Knights:]

PS: It was Barrick's myopic focus on commodity-based supposed "fundamentals" that caused it to engage in its disastrous hedging strategy.

Sep 17 11:58 AM

[Dave Wrixon:]

I know FIAT has a few problems with Chrysler (well actually, it probably has more than a few itself) but its not FIAT that is the problem, its the DOLLAR stupid.

Sep 17 04:14 PM

[buddhabill:]

When gold was @ $300, did $1000 seem unattainable? Well, $1000 seems reasonable given all of the QE, etc.

Plus the average retail investor all over the globe (save india) has yet to really discover gold and other PMs. Imagine if it was normal to have 10% of one's portfolio in PMs.

$3k gold and $100 silver would be unattailable....ly low with this level of demand.

Sep 17 06:02 PM

[Keer-eh Khar:]

$3000 Gold at 3000 Dow; when Silver will also be at $123/oz.
This by 2012 or before.

I have known this since 3 years ago when I bought gold below $500 and silver below $8 :)

Now go fly a kite budd.

Sep 17 10:41 PM

[KIT:]

Hmmm let gold run to $10,000 oz then impose a 90% tax gold profits.

The govt has a track record of hitting easy money

Sep 17 10:44 PM

[Mad Hedge F...:]

qqw Brace yourself for the impending gold shortage. Gold shortage? Yup. With the launch of the eighth gold ETF this yesterday, the ETFS Gold Trust (SGOL), total ETF holdings of the barbaric relic reached 54 million ounces worth $55 billion, more than total world production in 2008. Last year, South Africa suffered its steepest decline in gold production since 1901, falling 14%, to a mere 232 tons. It now ranks only third in global production of the yellow metal, after China and the US. Severe electricity rationing, a shortage of skilled workers, and more stringent mine safety regulations have been blamed. Choked off credit has frozen the development of new capital intensive deep mines, as it has for everybody else. Rising production costs have driven the global breakeven cost of new gold production up to $500 an ounce. In the meantime, the financial crisis has driven flight to safety demand for gold bars and coins to all time highs. Last year, the US Treasury ran out of one ounce $50 American Gold Eagle coins, now worth about $980. Competitive devaluations by almost every central bank, except Japan, mean that currencies are not performing as the hedge that many had hoped. It all has the makings of a serious gold shortage for the future. Could last year’s downturn be a blip in the eight year bull market? Now that we are solidly over $1,000, kissing $1,025 last night, the match could hit the fuel dump at any time.

Sep 17 11:42 PM

[datadave:]

WHAT RALLY? sorry, my caps lock was on....

spy up 5 times as much as gold. Any slack retailer in the US was a better bet than gold.

Maybe next year? ( yeah, sure with continued high unemployment, people will be eating their gold..... )

Sep 18 05:03 AM

[one eye:]

Year to date, the rally in the S&P far exceeds the move in Gold.

If the economy goes into a W, gold will not rise, just like it did not rise in sept/oct/nov of last year.

You can't have it both ways, the inflationary forces have to take hold.

However a bout with 1970's style Stagflation can provide the bounce needed for both to rise simultaneously.

Sep 18 11:57 AM