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Gold Will Shine On

|Includes:SPDR Gold Trust ETF (GLD), PHYS

Many investors are putting their money into gold to hedge against inflation, but gold-related stocks may prove to be a better deal.

Gold will Shine On

by André Ribeiro


Central banks all over the world have been debasing their currencies for some time by lowering interest rates. Some, such as the U.S. Federal Reserve, have resorted to quantitative easing. It is a fancy term which basically means printing money.

In the United States, the adjusted monetary base has more than tripled since 2008, as tracked by the Federal Reserve Bank of St Louis. This refers to the sum of currency, including coins, in circulation.

The debasing of the currency, however, fuels inflation, since it pushes down the value of money. It is little wonder that in such an environment many people have resorted to gold as a hedge against inflation and economic uncertainty due to central banks printing money.

While gold has been a great investment over the past decade, its price rising by around 500 percent since the end of 2000, the returns on select shares with exposure to gold are expected to perform even better in the next 10 years. These expectations are backed by forecasts of gold hitting US$2,000 (MOP16,000) an ounce in the next few months and reaching a new record of US$3,000 an ounce within the next 24 months.

The monetary expansion around the world should continue to ensure a positive environment for gold investments. Select gold-related shares will benefit the most, owing to leverage on the price of the metal. The U.S. Federal Reserve took an unprecedented step last month, committing itself to near-zero interest rates as long as unemployment remains high. Analysts said this was bullish for gold because it suggested that the U.S. central bank would keep creating new money to stimulate the economy.

Just Ask George

In the third quarter of last year India and Greater China continued to be the biggest source of consumer demand for gold, according to the World Gold Council. Together they accounted for 55 percent of demand for gold jewellery, bars and coins.

My expectation is that not only Chinese private investors but also the People's Bank of China will continue to accumulate gold at increasing rates. Many analysts believe that Beijing holds a far higher volume of gold reserves than the 1,054 tonnes that the World Gold Council thinks it holds. The mainland imported 286.8 tonnes of gold from Hong Kong in the first 10 months of last year, more than triple the amount it imported a year earlier, according to data from the Census and Statistics Department of the Hong Kong government.

Some of the world's leading fund managers have been building up their gold positions in recent months. Soros Fund Management LLC increased its holding in SPDR Gold Trust, the biggest gold-backed exchange-traded product, by 49 percent in the third quarter of last year, according to U.S. Securities and Exchange Commission filings. John Paulson has a considerable portion of his hedge funds tied to gold bullion, including a sizeable stake in SPDR Gold Trust, in which his Paulson & Co is the biggest shareholder. Naguib Sawiris, the second-richest man in Egypt, bought a Canadian gold producer for almost US$500 million in July.

Price Parabola

Ray Dalio, one of the world's most respected fund managers, told CNBC in September that gold should be in everyone's portfolio. Bill Gross, who runs the world's biggest bond fund at Pacific Investment Management Co, said last February that gold is a store of value when there is little value left in paper.

I personally regard gold as a form of saving, whereas select gold-related shares can be a very attractive investment, providing higher returns, especially these days.

Buying precious-metal-related stocks is certainly not free of risk. But there is risk in buying any stock. Here, the risk can be minimised and higher returns achieved by choosing stocks of companies that have proven management practices and sound assets, work in less politically risky parts of the world and are on track toward big growth.

I believe the parabolic trend phase for gold prices is still ahead of us, and that a medium-term price of US$5,000 an ounce could be a conservative estimate. History indicates that prices between US$5,000 and US$10,000 may be realised in the longer term. Increases of 200 percent to 500 percent or more in prices of select gold-related shares will not be uncommon in the next three to five years.


Stocks: GLD, PHYS