As we enter the contraction phase of the economy (a state which leads to recession), inflation is rampant. The USD‘s weak and will stay so due to the inability of the Fed to increase the interest rates. Had we not experienced the sub-prime crisis and the resulting mess in the financial sector; the interest rates would’ve surely been increased by now. Nevertheless, an increase in interest rates is imminent and inevitable.
Having said this, I strongly feel that Gold is going to see a huge growth going forward. Given the data-driven person I am, my belief is derived from the following data-points.
- We are in an Oil bubble right now. It’s bound to burst (in my opinion by the end of the year oil prices will settle in the $120-140 range) as unlike the 1970’s this time around the prices are not being driven up due to a shortage in supply. Instead they are being driven to crazy levels by sheer speculation and market-mongering. This bubble burst is forcing investors into a holding pattern and what better investment to make than Gold. The price of Gold went up and settled nicely in the $900’s which is reasonably priced for most investors, today
- Inflation is high. Given that the M3 numbers are not disclosed by the Feds any longer, the 4.2% official number is a farce.
- The price of Oil is eating into margins of finished and unfinished goods and thereby driving inflation up.
- The chart below gives the price of Gold in today’s (2006) dollars and the actual value. Two interesting points to note
- During times of inflation or recession in the economy, Gold prices always sky-rocket
- In the late 70s and early 80’s when the US was in severe recession or stagflation (depending on which of the two you ardently believe in), the interest rates went up tremendously to curb the inflation rates. At that time, Gold traded at over $1600 in today’s dollars
click to enlarge
- Historically, whenever the stock market’s down, investors turn to gold to secure their investments. This next chart explains the Dow/Gold ratio very clearly. Gold’s been on a rise since 2001, mainly due to the increase in the monetary supply in the US and Europe (monetary inflation) and the high deficits (account and trade) in the US, which has driven up inflation in turn and also weakened the dollar
Gold ‘s rise will continue and we can expect to see Gold get very close to the $1000- $1200 mark in the next 6-12 months. Gold investments are usually in the following form:
- Bars
- Coins
- Exchange-traded funds (Gold ETFs or GETFs)
- Derivatives
- Mining companies
The following chart shows how GETFs and other unhedged and hedged gold stocks have done in the recent past. It’s been on the rise and will continue to grow as more investors withdraw from the stock market and try to consolidate their investments into a solid sector.
A quick look at the price of Gold shows that Gold is in a steady-state. It’s an early trend and has the potential for great returns, even in this receding economy.
Finally, the performance of a company GOLD and a Gold index ^XAU against the Dow, Nasdaq and S&P500 over the past 5 years is shown below. Gold indeed is on a roll.
Some good investment choices, if Gold’s your thing:
- Yamaha Gold (AUY), mining stock
- Randgold Resources Ltd (GOLD), mining stock
- Fidelity Select Gold [FSAGX], Mutual Fund
- American Century Global Gold [BGEIX], Mutual Fund
- streetTRACKS Gold Shares (GLD), an ETF which tracks the price of the bullion
- iShares COMEX Gold Trust (IAU), an ETF which tracks the price of the bullion
- MarketVectors Gold Miners (GDX), an ETF which tracks stocks of gold mining companies
As I said earlier, the golden run of gold is all set to continue.
Disclosure: At the time of publication, I own rare gold coins but none of the securities mentioned in this article.
This article has 19 comments:
Stockerati asserts:
During times of inflation or recession in the economy, Gold prices always sky-rocket.
You should have taken a look at a historical gold price chart and line it up with recession and inflation to see if there is any correlation. I see consistency.
The 200 YEAR DOW/GOLD Ratio is particularly misleading. The positive-sloped green band actually means the in the period, gold underperformed DOW except when the line dipped outside the band briefly for a few times.
I believe gold will go up, but not for the reasons the author made up.
I see no consistency.
Also check BHP's Iron ore new contract price with Baosteel, up 96.5% y-on-y.
Gold is coming out of the woodwork in the US, just see the ads to buy gold on TV. Refinery runs up considerably, not so with silver.
The spike in the price indicates that oil is leveraged; a 20% increase in demand resulted in a near 100% increase in price. I don't know the exact leverage mechanism and I'm not willing to claim a guess is fact. We know what is happening, but I have not found any solid numbers that point to why it's happening. Without such numbers, it's all speculation on speculation.
Try harder next time.
I saw no where in the article about how the COT reports, have shown a huge amount of the combined shorts of 4 or more traders,both at Comex & in the ETF's are impacting the unfree markets! Naked Short Selling has now opened up a can of worms! How has it changed the spot prices in PMs? Timely take downs of spot prices? Why traders in Canada are leaving in masses out of PM ETFs? Demands to take deliverly of Silver Bullion at the Pert Mint are having a hard time, or very long waits,unreturned Emails,phone calls, to get shipment status? SLV,is without its on problems! Many are on a list for deliverly of their bullion,with all the rumors of Naked Short Selling in SLV,folks are scared of loseing everthing,due to defalt? Why is this unfolding,look to the vast rise in M3, LIBOR lies,G8,BIS,WB & of course, Goldmans relationship to the Fed!!
He did not list any of these enities & the direct results they play on miner stocks,Spot prices,why oil is tied to the M3? He left so much out,he needs to check the daily updates at shadowstats.com or org, before he writes,he will be more informed!!
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"we can expect to see Gold get very close to the $1000- $1200 mark in the next 6-12 months".
Very close, eh?
As J. P. Morgan himself said, gold is money. When you don't want to invest in equity and real interest rates on debt are negative, you should convert most of your assets into gold and sit on it until something changes. But don't confuse sitting on a metal brick with investing; everyone holding gold (including me) is either sitting on the sidelines in our preferred form of cash or speculating. Nothing wrong with that, but it's critical that you never confuse them. There is a time to invest, a time to speculate, and a time to sit in cash. Don't fall in love with your "investment" any more than you would a $100 bill. Yes, it's better at being money than the paper, but it's no better an investment.