Investments able to buck financial calamity, inflation, an anemic currency and a loss of economic confidence among foreign debtors ― all monkeys on the back of the United States today ― are rare commodities.
It appears that gold may be the rarest of all.
While domestic and international markets tumbled day-after-day in the first three months of 2008, gold climbed to an historical high of $1,000 an ounce and shows signs of reaching greater heights in the near term . When all else looks risky, gold flourishes.
"After all, in a credit crunch, cash is deemed to be king. In which case, gold owned outright has just been crowned emperor."
― Adrian Ash, BullionVault
Used as money for more than 3,500 years, gold thrives on crisis and investors' fears. Two of the biggest drivers, a rapidly depreciating dollar and growing inflation, have helped catapult the price of gold more than 60% over the past two years.
Don't think for one second that gold has run its course. In inflation-adjusted terms, today's gold prices don't hold a candle to what they were in 1980, when the Soviets attacked Afghanistan and prices rose to $875.
Today, that ounce would be worth $2,200 . Even if gold tops $1,500 next month, it won't be near its potential inflation-based price.
"We don't see any reason in this cycle why gold shouldn't reach its real all-time high, which is actually about $2,200 an ounce."
― David Garofalo, CFO, Agnico-Eagle Mines
I firmly believe that gold's seemingly unencumbered price-raising rampage will propel the yellow metal to $3,000. It's just a matter of time. I don't even consider myself a gold bug, but I'd be somewhat negligent not to bring to your immediate attention this once-in-a-lifetime opportunity.
The start of this commodities run began in 1999. As Jim Rogers, author of Hot Commodities writes, "The shortest bull market for commodities lasted 15 years, the longest 23 years, so if history is any guide, they've got a long way to go. This is not a bubble."
The up tick in gold is a mere 9 years old, so we should see at least six more years of this party ― maybe more ― with a whole lot of investors making a boatload of cash.
The bottom line is that the problems plaguing the United States ― the same ones that propel the price of gold ― are far from over. That's good news for investors in the yellow metal.
In my new gold stock research report, Gold Rush 2008: 5 Gold Stocks to Profit from in a Down Market , we're recommending five gold mining stocks, all Canada-based, fully leveraged to the price of gold and nearly immune from the chaos enveloping the financial industry.
Before going into detail about these top stocks and the opportunities they present and telling you how to get your copy of the report right now, I want to delve a little deeper into what makes gold tick, why it will continue ticking, how history provides a gauge for the future, and where your entry points for profitable investing lay.
Falling Dollar Equals Rising Gold Prices
As the US dollar weakens, the price of gold strengthens. When the dollar fell in 1982 and 1983, the price of gold rose from $294 an ounce to $514 an ounce in just nine months ― an increase of 74%. It happened again from 1985 to 1987, when a drop in the dollar propelled the price of gold from $282 to $502 over 21 months ― an increase of 78%.
Comparatively speaking, our currency is in even more trouble: the Fed appears to be using the US dollar in an attempt to ward off a recession and spark the economy.
As nervous global financial markets sold off in January, the Fed "came to the rescue" after fearing the US credit crisis would sink the US economy. After three previous quarter-point cuts, it came down even harder with a 75-basis point drop, the largest cut since 1982. That was followed shortly by another 50-point cut.
"Suddenly, the world is realizing that gold is still a safe haven asset. We've seen pretty substantial losses in equity markets. I think this is genuine safe-haven buying."
― James Moore, theBullionDesk
As the dollar enters its next down phase, the United States could easily suffer a flight of capital. Not only will you see each dollar buy less, but, more importantly, there could be less demand for dollars, as foreign investors slash the flow of dollars from Asia, Europe, and the Middle East... or our biggest debtors start to pull their money from US Treasuries.
Gold Thrives in Inflationary Times
Like the dollar, inflation and the price of gold are highly correlated. Since the end of World War II, the five steepest years of US inflation were 1946, 1974, 1975, 1979 and 1980. During those five years, the average real return on hot stocks, as measured by the Dow, was -12.33%; the average real return on gold was 130.4%.
During the 1970s, gold soared to 23 times its value and a $50,000 investment would have made you a millionaire almost overnight .
Historically, gold has served as a hedge not only against inflation, but also against deflation. For example, in the slump following the "Wall Street Crash," from September 1929 to April 1932, the Dow Jones Industrial Index slid 85%, to 56 from 382. Some 4,000 US banks closed their doors. Meanwhile, the price of gold actually went up.
High Demand, Short Supply Deliver a Unique Profit Opportunity to Decisive Investors
Power shortages in South Africa in late January forced its three biggest gold producers ― AngloGold Ashanti, Gold Fields and Harmony ― to suspend production. And recent reports from the power producers of South Africa indicate that it could take at least 5 years for them to ramp up electricity production to meet growing demand.
With no end in sight to the country's energy crisis, ongoing stoppages would affect the gold supply, raising prices and likely profits for mining companies in other countries. South Africa is the world's second-largest producer of gold. This is huge.
That, coupled with growing investment and consumer demand from China and India, makes it even likelier that gold prices will move higher.
For example, demand for gold-based Exchange Traded Funds (ETFs) has skyrocketed. Forbes recently reported that "inflows into physically backed ETFs have risen by 32.5% this year," according to a daily research report by Barclays Capital. This added 205 metric tons to demand.
When gold ETFs were first launched in 2003, they attracted mostly institutional investors. Today the balance is shifting, and more and more retail investors are considering gold ETFs as an essential component of a well-balanced portfolio.
"I think by the end of 2010 we'll be north of $2,000 and could be as high as $5,000. So why is it going to go to $2,000? Because people are going to lose confidence in financial assets, in paper, in real estate, in the banking system. They're going to get nervous about their money. And we've seen it happen twice in the last 110 years."
― Rob McEwen, Founder of Goldcorp
The oldest and biggest gold ETF is streetTracks Gold Shares, trading under the ticker GLD. It has become a proxy for many investors. Even as you read this, money is flowing into GLD at a tremendous rate. This ETF holds more than $16.8 billion in gold, more than the central bank of China, giving GLD a valuation greater than General Motors .
All ETFs are designed to track their underlying indexes, and so GLD tracks the actual price of gold in a way similar to a gold futures contract. But you don't have to have any special futures trading knowledge to capture futures-like profits. GLD is up +16.6% thus far in 2008.
As or more significant with respect to investment demand, gold futures began trading in Shanghai, China on Jan. 9 ― a move expected to push demand massively higher.
The new market traded contracts for about 350,000 ounces of gold on its first day, a level that traders considered extremely positive given the fact that the well-established Comex, the New York-based metals exchange, usually trades about 800,000 to 1 million ounces a day.
Some strategists consider the launch of the Shanghai gold futures the most important development in the bullion market since the introduction of exchange-traded funds in 2003.
The eight largest gold ETFs now hold about 840 tons of gold ― more than the official bullion reserves of the European Central Bank. Expectations are for overall Chinese gold demand in 2008 to increase from last year's estimated 300 tons.
China is the world's third-largest consumer of gold used for jewelry and investment after India and the United States, according to the World Gold Council. And with the growing middle class in China demanding a more Western-like lifestyle each day, you can expect demand for gold to only increase.
Gold and Oil Move in Tandem
As you may have figured out already, the price of gold bullion and crude oil are highly correlated. Over the past 60 years, one ounce of gold has on average purchased 15.2 barrels of oil. With gold trading at around $1,000 per ounce and crude oil trading at $106, this ratio today stands at 9.4:1 as of this writing.
Even if you're not an oil person, you know that oil is on the rise. Now, the price of oil continues to break all-time highs. While some have stated that oil may not continue to trade over $100 indefinitely, its unlikely to retreat much below $80 anytime soon, especially when looking at the huge demand coming out of the booming Asian economies including China and India combined with supply issues.
The price of gold has not been sitting out the commodity rally through. It's up 32% so far in 2008. In spite of gold's recent gains, the ratio remains out of whack.
The idea here is that with oil unlikely to decline below $80 anytime soon, the price of gold is likely to rally in the coming years - and in a big way. Historical data shows that when the ratio falls below 11 (meaning one ounce of gold will buy you 11 barrels of oil), the ratio not only will come back in line with the average, but that speculation drives the ratio above the historical average of 15.2, as has been evidenced every time that the ratio fell below 11.
One could argue that we now live in different times with the global commodity markets, and ratios such as gold-to-oil are no longer meaningful.
I disagree and am willing to bet that commodity prices are in fact highly correlated, and that historical relationships between prices are likely to remain intact for the foreseeable future.
How Individual Investors Can Capture Profits from Gold
When you think of gold investments, what comes to mind? A vault packed with stacks of gold bars, rare coins neatly arranged in a collector's binder for passing from generation-to-generation, or the ever-popular "gold you can fold" certificates that eliminate the need for storage?
These most direct ways to own gold have been around for a long time. It's a guarantee that your investment is 100% correlated to the price of gold, so there are no impurities to mettle with your profits.
Many people still opt for buying physical gold in one of the above forms, but as the gold bull rages on and individual investors clamor to get in on the action, more and more tools are popping up and making it easier and more practical for you to own a nugget or two in some way, shape or form.
In my new research report, Gold Rush 2008: 5 Gold Stocks to Profit from in a Down Market , we've targeted what we believe are five mining companies that provide the best opportunity for profiting from the gold bull market.
All of them are Canadian, have proven gold reserves, and are currently unhedged to take advantage of historically high gold prices.
How Hedging Can Hinder Your Profits and How the Five Companies in My New Report Maximize Their Potential
Hedging, when mining companies lock in today's price of gold to be paid by a bank at a future date when the gold is produced, is used to protect cash flow and manage risk in the event the yellow metal falls in value.
In boom times, this practice can line banks' pockets with cash and rob shareholders of serious profit. The higher gold prices climb, the worse it is for hedged gold mines and shareholders whose losses mount exponentially as gold prices march upward.
On the other hand, the sky's the limit for non-hedging mining companies.
In January 2001, an ounce of gold sold for $274. At that time, shares of Kinross Corp. (KGC), one of the companies we recommend in my new report, had a price tag of $1.44. In January 2008, gold hit a record high of $900 (seems like a distant memory, doesn't it?) for a 228% gain over seven years. Meanwhile, this best stock skyrocketed to $21 or 1,358%.
Estimates show that every 10% change in gold price results in a 20% change in the NAV of Kinross stock. On Jan. 3, 2007 gold sold for $642.60 per ounce, while this stock went for $11.42. Exactly one year later, gold had risen 34% to $858.85. Meanwhile, KGC soared 82% to $20.81. Considering where gold is headed, it's still a bargain.
Investing in a gold miner gives you exposure to the rise in gold prices, higher returns if the miner discovers more gold, and liquidity.
Start Profiting from the Gold Bull Market Request my Free Report Now
So I've laid out the case for why gold will go to $3,000 and make decisive investors wealthy along the way.
You've just seen gold break the $1,000 mark and it's going to keep going and keep making rewarding investors.
I've shared with you one of the companies profiled in my new hot stocks market research report.
Now's your chance to get detailed reports and comprehensive analysis on all five companies in the report. When you request your copy of my must-read report (it's free by the way), you'll also receive a 30 day complimentary subscription to Top Stock Insights , an investment advisory newsletter service that brings you solid mid and large cap recommendations.
You'll receive my gold stocks report plus a 30 day complimentary subscription to Top Stock Insights with the option to continue for a full year at 1/2 off the normal subscription rate.
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