When most people think of gold they think back to stories about when most of the world's currencies were backed by gold. At the end of the last century, however, gold lost its luster as investors turned away because of low spot prices and profitability by mining companies worldwide. Investors were more interested in .com IPO's and technology stocks.
But since the turn of the century, especially in the last few years, gold has regained its luster among a small group of investors. Rising inflation, rising demand, and falling production along with underinvestment has created an almost perfect storm for investors.
One chart that investors should reference is the Dow/Gold price chart over the past 100 years. Just one look will tell you why I expect the ratio to fall to somewhere between 3 and 5 over the next 5-10 years.
Saying that gold will reach 3,000/oz may seem crazy but I will lay out three reasons why this will happen and the most important and final reason will be the one that you have never considered.
To start, gold has historically been known as a store of value. Thousands of years ago gold was used as one of the original currencies. In lean times or in times of increasing inflation people fled to gold as a safe haven to protect the value of their investments. Since 2002, the United States has had increasing inflation, significant money printing, and a depreciating currency which has left the country with a loss of purchasing power. It is no wonder that gold prices have moved up to almost $700/oz. Smart investors realize that gold will hold its value against a loss of purchasing power.
The second reason is similar to my interest in Uranium. When the gold price fell to around $300/oz. companies cut expenses and abandoned exploration projects focusing on cost cutting and hedging production to lock in revenues. With the rise in the gold price companies have tiptoed back into exploration and begun to deleverage their hedge book, fully exposing them to the rising price of gold. Over the last five years the price of gold has risen at a greater rate than expenses returning companies back to profitability. Gold exploration is currently done by junior mining companies doing a combination of greenfield exploration and going over deposits drilled 20 and 30 years ago with current technology in hopes of expanding the discovery.
The final and most important reason is due to global demand. If one looks at where the US dollars are flowing they notice that they are going to three primary areas in the world, the Middle East, China, and India. In each of these cases, gold is considered an important investment and a store of value. In the Middle East, they follow two numbers, the oil price and the price of gold. Moving to India and China, gold is considered a store of value and given as gifts on special occasions. Across Asia and the Middle East, gold is seen as a lucky gift and often brides and grooms are showered with gifts of gold on their wedding day.
In the first quarter of 2007, India's gold consumption soared to 211 tons compared with 140.7 tons the year before due to higher jewelery and retail investment. As the billion baby boomers in Asia, India, and Middle East grow up and get married gold consumption will only increase going forward. Very few people have factored this into their calculations.
I believe that once gold moves above $700/oz it is a straight shot to $850, then $1,000. Once we break $1,000, get ready for a wild ride as Asian and Middle Eastern investors run to grab gold with American and European investors following behind. Eventually, the Dow/Gold ratio will go back to somewhere between 3 and 5 and the higher the Dow goes the higher my gold target will go.