Get Ready For A Gold Rush

by: David Urban

Gold (GLD, DGP) has a tough history with investors. Many pundits look at gold as a relic with no yield but in reality gold is about to reclaim its position as a safe haven in times of trouble.

During the first quarter of 2012 China imported 135,529 kilograms or 4.78 million ounces of gold from Hong Kong up from 19,729 kilograms a year ago. Given the slowdown in the Chinese economy and worldwide it is not surprising that the Chinese are choosing to diversify their reserves outside of US Treasuries.

To put this number into better perspective, in the first quarter of 2012 Barrick Gold (NYSE:ABX) produced 1.88 million ounces, Newmont Mining (NYSE:NEM) produced 1.3 million attributable ounces, Newcrest Mining (OTCPK:NCMGY) produced 532,000 ounces, and Anglogold Ashanti (NYSE:AU) produced 981,000 ounces for a total of approximately 4.69 million ounces of gold.

European leaders continue to struggle with a banking system that has locked up as Greek banks have been moved from the regular refinancing operations into the special European Liquidity Assistance program. The Spanish government looks ready to repeat the mistake of Bankia merging small, weak banks into one larger and just as weak bank.

The ECB will hold a meeting this week in which they are rumored to cut rates and possibly start buying Spanish and/or Italian debt although that may spur a panic rather than actually help.

In the US, investors are searching for another injection of QE from the Federal Reserve after a weak May jobs report. Market sentiment towards QE is taking on that of a drug user in that when the QE runs out the market falls expecting another fix to push up prices. While the market may be looking for another QE or an extension of Operation Twist the reality is that additional quantitative easing pushes the Federal Reserve ever closer to a liquidity trap and a Japanese style environment, if we are not already there.

In these trying times the downside for gold is far lower than most realize while the upside is in the area of $2,800 per ounce based on historical factors. The summer may cause a bit more consternation but the stars are aligning for another major run in the gold price to new highs and beyond.

Disclosure: I am long DGP.