Smaller Than You Think

What is gold really worth? There are a lot of arguments regarding gold's true value. How can anyone justify that an ounce of gold is worth over $1100/oz? Do people even know exactly what an ounce of gold looks like?
What is gold really worth? There are a lot of arguments regarding gold's true value. How can anyone justify that an ounce of gold is worth over $1100/oz? Do people even know exactly what an ounce of gold looks like?

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What is gold really worth?

There are a lot of arguments regarding gold’s true value. How can anyone justify that an ounce of gold is worth over $1100/oz? Do people even know exactly what an ounce of gold looks like?

Take a look at the picture on the right.

Ounce of Gold in Hand Comparison

Not very big, is it?

The fact is gold really does nothing but sit around and look pretty. And believe us, because of this, there are many anti-gold bugs out there who have been shooting darts at our faces for our continued belief in gold-related plays.

So let’s clear the air once again. We are not gold bugs. But we do take advantage of the obvious. And the obvious is simple:

Gold is worth a lot of money right now

Gold, like the pieces of paper in our wallets we call money, is something that people can put value to. But there’s one big difference: You can print as much money as you want. But you can’t with gold. There’s only so much.

And everyone wants a piece…especially the banks.

Last year, the world’s central banks became net gold buyers for the first time in two decades and according to CPM Group, this trend could continue. Right now, central banks hold approximately 18 percent of the total gold ever produced.

A recent Bloomberg survey reported 15 of 22 analysts forecasting that gold would make further gains this year, with Goldman Sachs predicting $1,380/oz in the next 12 months and HSBC predicting a peak of $1,300/oz in 2010 and as high as $5000/oz in the next five years.

During the past decade, precious metals were the best-performing asset class, beating property and shares with returns of nearly 250 per cent. People who invested money in precious metals, such as gold, silver and platinum, during the ten years to December 2009 made returns of 242 per cent, the equivalent of a gain of 13.1 per cent a year.

It’s no secret that gold, the most recognized of the precious metals, has taken center stage.

In past newsletters we told our readers to follow where the smart money goes (see Where the Billionaires Invest).

And it’s still going into gold

Just last week, we mentioned why famed hedge fund managers such as George Soros and John Paulson are investing in gold, with billions upon billions already directly tied to gold through the GLD ETF (see Nothing We Can Do).

We understand that that their significant holdings in GLD is a hedge against their share class, but their bullishness in the gold sector remains. That’s why Paulson started a new gold fund this year that invest primarily in the equity of gold mining companies and some derivatives on the price of gold. His gold fund’s objective “is to outperform gold price in a rising gold price environment.”

This past week, both George Soros and John Paulson made yet another bet on gold with a new investment of $175 million into Novagold, a company focused on gold exploration, development and mining and one that we have had on our watch list for quite some time. Yes, they were able to pick up shares at a significant discount to the market. But the fact remains, two of the biggest hedge funds in the world are investing in gold explorers and miners.

Practically all of us do not have the monetary capacity to invest like George Soros and John Paulson. We are not all able to pick up shares immediately at a discount to the market. That’s why investors like ourselves need to beat the heat by looking at miners that have the ability to raise funds while building a strong portfolio of assets with strong gold resources. At the same time, they need to be under the radar enough that their shares are still undervalued so that we can pick them up at a discount to the market – without spending $175 million.

For months we have been placing bets on gold miners instead of the price of gold itself. Gold miners and juniors have the ability to significantly leverage the price of gold through many avenues. Not only can they achieve substantial gains in share value through the rising price of gold, they can also benefit from new discoveries and takeover/merger activities.

We’re not saying to go out and buy every gold company with a resource because we do expect a strong market correction. But we are saying that over the next few years, we expect commodities to outperform.

Along with it, many juniors will make significant gains.

When all else failed last year, the resource sector remained strong with trading volumes and overall capital financing consistently high. Unlike other sectors where new money was scarce and plagued by light volume, the resource sector stormed through and bounced back stronger than any other sector.

Back in March of 2009, when analysts and economists were telling everyone to horde cash, we put it in the miners. Since then, the miners are up considerably against other indices. (see The Report That Shocked the World)

Of course, there is a possibility of gold trending downward.

However, even if gold were to hit $900/oz, gold prices are still strong enough where discovery and takeovers are going to be rewarded.

If you are going to invest in a junior, you have to think like a major

With the recent bids we have seen for juniors, it appears that the majors are using valuations of around $900/oz for their bid prices when looking at takeover targets.

That means a lot of the juniors are still attractive to the majors at a lower price point. Conversely, if gold continues to rise, it can not only add substantial value to the juniors with strong resources, but makes their projects that much more viable as people scram for more gold.

Of course, exploration is a negative cash flow business so it’s imperative that companies are able to raise money. That’s why we will continue to follow and invest in companies with ounces in the ground, cash in the bank, and enough management power to raise the funds necessary to advance.

Gold As a Currency

It’s no secret the demand for gold is continuing to rise as a reserve currency. That is why we need to start looking at gold as a currency, and not just a commodity that just sits there and looks pretty.

Next week, by reader demand, we’re going to continue with a follow up on one of our most talked about newsletter editions, “The Crash of 2010.

You won’t want to miss some of the headlines that the government has been hiding from you…

Stay tuned.