Gold and silver bars on a white background

The Next Big Boom

Last week, we mentioned that despite poor economic conditions and reports, the Dollar will sink and both precious metals and stocks will climb (see Two Birds, One Stone – The American Secret.)

This past week, all of those events came true.

But will this rally continue? More importantly, will gold and silver’s performance continue to beat the market?

We have been extremely bullish on precious metals over the last few years. There are simply too many concrete reasons why gold and precious metals will most likely continue their run, despite market conditions (see The Report That Shocked the World.)

In the short-term, gold could have its dips (as with every tradable investment.) In the end, however, gold should prevail as inflation will eventually kick in within the next 5-10 years (see Where the Billionaires Invest.) Once that happens, the price of an inflation adjusted gold ounce would be more than $2000/oz.

But sceptics will continue to scream bubble, as they did before gold shot past $1000. So let’s once again go over why gold will continue to climb and how we can profit from this run.

The Truth About Gold

Gold is as good as cash. Actually, it’s better – its climbing while the dollar is sinking. While sceptics continue to say that gold is not a good investment, let’s compare it to both stocks and the real estate market. What you are about to read may shock you.

 

  • In the past three years, gold is up more than 37%. The S & P 500 is down 26%. US real estate is down 13%.
  • In the past five years, gold is up more than 207%. The S & P 500 is down 7%. US real estate is down 15%.
  • In the past ten years, gold is up more than 475%. The S & P 500 is down 20%. Luckily, US real estate is up 23%.

Despite the price of gold, gold is a liquid asset. You can buy things with it, sell it, trade it, and even wear it. (see Smaller Than You Think)

Investors, funds, and institutions are buying up gold faster than you can sneeze – including life insurance companies. Northwestern Mutual Life Insurance Co., the third-largest U.S. life insurer by 2008 sales, has bought gold for the first time in the company’s 152-year history to hedge against further asset declines earlier this year, according to a report from Bloomberg.

Goldman Sachs, probably the biggest player of them all, is predicting that gold will shoot past $1,400/ounce by 2011 on the basis that central banks are becoming net buyers of gold, that gold ETFs are continuing to buy substantial volumes, and that real estate prices will remain depressed.

Right now central banks are drastically curtailing their sales of gold and many are continuing to buy large quantities. For the first time in 22 years, these banks are net buyers of gold. According to a report by precious-metals research firm GFMS, for the first time since 1987, central banks around the world bought more gold in the second quarter than they sold. They are also bound by an agreement that imposes limits on sales. (see Where the Billionaires Invest)

The US is the number one world power and also owns the most gold in its central bank. Remember when the US currency was pegged against gold? And silver? When US’ founding fathers wrote the constitution, they made gold money. The world listened.

It’s no longer a secret that the demand for gold is continuing to rise as a reserve currency all over the world – especially for the world’s second largest economy, China.

As recently as 2002, the private ownership of gold was prohibited in China. But since 2009, the central Chinese government removed all restrictions and began to encourage their citizens to buy precious metals such as gold and silver. China, whose foreign currency reserves holds $2 Trillion with only 2% in gold (vs. a 10% worldwide average), is still looking to buy large quantities – especially on the dips.

The Chinese are seeing the value of their foreign currency reserves (the US Dollar, in particular) lose value every day and are doing everything in their power to keep their Yuan down (see The American Secret). If China makes the logical move to increase its gold reserves and reduce its fiat currency exposure to even just the worldwide average, gold prices could move substantially higher.

Earlier in the year, China’s state-owned Assets Supervision and Administration Commission (Ji Xiaonan, the Chief) said:

“We recommend China increase its gold reserves to 6,000 metric tons within three-to-five years and possibly to 10,000 tons in eight to 10 years.

According to the calculations of David Rosenberg, Former Chief North American Economist at Bank of America-Merrill Lynch in New York:

“…if China were to lift their gold reserves to 5,000 tonnes, which is equivalent to about two years of global production, that shift in demand would boost the gold price by $800/oz to around $2,000 ($1,978) based on our models. If China moves towards 10,000 tonnes, well, that would end up taking the gold price to $2,623/ounce if our calculations are in the ball-park.”

China isn’t the only country continuing to buy gold. India bought 200 metric tons of gold from the IMF, at $1,045 an ounce earlier this year. Even small countries such as Sri Lanka and Mauritius are buying large quantities of gold. (see Where the Billionaires Invest)

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.

Why Gold is Rising

We all know that gold is going up because of fear, of anxiety, and of government recklessness . The US government is spending more than it is taking in, which is ultimately undermining its own currency (see the Double Take.)

Of course, the US knows this. They have been doubting the dollar for years (see A New World Currency.)

But it`s not just the US.

Central banks around the world are doing the exactly same thing. When you no longer have any currencies that you can measure against, people will turn to gold.

Remember, the Federal Reserve is not on your side. Its going to keep printing money. Its going to encourage the US government to keep borrowing from it. It’s going to continue to make billions upon billions of interest from the US – and eventually trillions.

As long as the Fed continues to print money, gold should continue to go up.

Why would the Fed stop? It only costs them around 5-7 cents to print a $100 bill…

Gold Will Always Have Value

While we continue to use fiat currencies today, a fact that will unlikely change, people have turned to gold for over 5000 years.

So while yes, there are other metals such as palladium, titanium, even diamonds, that have both useful and intrinsic value, people will always turn to gold as a store of true value.

Those who believe otherwise have already missed out on a lot of profits.

Let’s face it, the English language has been around for less than 2000 years. Gold has been around for over 5000 years.

Why would that change now?

The Juniors Time to Shine

So where does this leave equities and how are we going to profit from this gold run?

Many senior producers are no longer hedged, which means that their profits and earnings should begin to climb much higher if current gold prices hold where they are today.

Historically, when gold miners’ profitability improves, history shows that stocks enjoy positive relative price strength. The biggest difference now that was missing in previous gold bull markets, was the fact that many senior producers had large hedge books (see Barrick Closes Hedge Book.)

Remember, some of these senior producers with hedge books had obligations to sell gold at $300-400/oz – even at today’s prices!

But now that most of them have closed their hedge books, this could mean big returns for gold producers and in return, their shareholders.

When the seniors make more money, they will spend more money on acquisitions which will fuel the junior resource sector.

This has already happened throughout the year with many takeover bids and battles for commodity stocks – including Gammon Gold’s recent bid for Capital Gold Corp for $288 million (see news release.)

As the gold bull market matures, more money will flow into the speculative junior stocks from all over the world. Institutions will once again pour money into the junior sector and we may very well see one of the largest bull runs in the junior resource sector in the coming year.

While the road to the top will not be a straight line, it only makes sense to take advantage of the inevitable corrections.

If gold holds at these prices over the next year, those invested in the right junior resource stocks will be laughing all the way to the bank…

Until next time,

Ivan Lo
Managing Director, Equedia Weekly
Equedia Network Corporation
www.equedia.com

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