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OK, gold bugs, time to start your engines.
It’s beginning to look like a good idea to take on extra ballast as the winds of change threaten to blow us all away.
The week began with an old-fashioned run on the bank. People were lined up around the block to take their savings out of Northern Rock, a large UK mortgage lender, even though the Bank of England said it will provide funds as needed.
And then Alan Greenspan, who wields a lot of clout even though he’s no longer head of the US Federal Reserve Bank, told 60 Minutes he’s worried that the lending crisis is far from over and he’s now convinced that inflation is back.
As if to confirm Greenspan’s worst fears, his successor Ben Bernanke is widely expected to drop the federal funds interest rate by a quarter of a percentage point on Tuesday, putting further pressure on the U.S. dollar.
So the price of gold, that perennial safe haven, has climbed back up over the $700 (U.S.) mark, and as this is written, the December gold delivery price is at $723.30, and that’s before any news from the Fed. Most precious metals rose on the gold tide, and that includes the world’s newest precious metal, copper, which is up to $3.42 a pound.
Gold fans know that the short-term is ripe for some profit-taking, as $723.30 is certainly nosebleed territory - the metal has only broken the $700 mark a few times in the last 50 years. But gold climbed to the mind-boggling heights of $850 in 1980, which leads one to suspect that there’s still an upside, depending on the level of panic, and there are also some long-term factors that indicate the possibility of a real bull market for gold and related investments.
So with demand rising and production falling, there doesn’t seem to be any fundamental reason to back away from gold. Be prepared for a fair amount of volatility, fueled by variables such as the de-hedging that many gold companies are currently engaging in to take advantage of the current spot price, but that will decrease in the coming months, thanks to the fact that world leaders such as Barrick (TSE: HCX), have already cleared their hedge books.
The entry price for actual bullion is steep, but there’s more than one way to mine the gold in them thar hills, such as the aforementioned ETFs and gold mining stocks.
StreetTRACKS Gold Shares (NYSE:GLD) is the world’s largest gold bullion ETF, with more than 500 tonnes or 16 million ounces of gold - that’s 80 per cent of all ETF gold. GLD has more gold than Saudi Arabia or the UK. It’s ideally suited for an investor who doesn’t actually want to hoard gold bricks, and at $70 (U.S.), is only one-tenth the price of an ounce of gold. What a deal!
Canada is home to some of the best-performing gold stocks in North America, notably Yamana Gold Inc. (TSE:YRI) and Kinross Gold Corp (TSE:K). These are hardly the only ones, but examples of solid mid-range stocks, priced at $11.40 and $14.40 (CAN) respectively, and Kinross has the added benefit of being profitable. (Full disclosure-I’ve done some consulting work for Kinross, although I own no shares in the company.)
These two stocks, both featured by Marketwatch’s Jim Cramer in recent months, are strangely not among those mentioned on the Raw Greed blog, which offers a number of other worthy alternatives for those interested in allegedly upcoming strike. Raw Greed gets the Gordon Gekko Award for Telling It Like It is. Blogger Andy comments:
“Prices of many gold and silver mining stocks are far more depressed than the actual price of the metals. Plenty of gold mining stocks are trading as if gold were closer to $600 instead of $700. Silver mining stocks are trading as if silver were closer to $10 instead of $13. There is a lot of catching up to do to for prices of precious metals equities to match physical prices. I suspect that we may shatter all records on the heels of the Fed.”
This is the kind of crazy talk that could fuel a gold rush, but there is an uneasy consensus that gold stocks are undervalued in light of the price of the commodity, and this could be a good time to buy gold stock. If you pick carefully, you get a good company instead of a lump of metal that has an historic, atavistic quality that makes many stock pickers nervous.
Philip Klapwijk, of the highly respected London-based Gold Survey, says essentially the same thing as the Raw Greed blogger, in slightly more responsible-sounding language: “In the medium term, nevertheless, continue revaluation of the risk-return trade-offs of traditional investments, the persistence of tensions in the Middle East and good underpinnings by gold’s fundamentals are expected to continue to attract investors with a long-term outlook to the metal, providing essential fuel for a continued bull run towards and eventually to a 26-year high.”
And they’re off!
Paul Sullivan is a longtime Vancouver journalist and president of Sullivan Media. He also writes for The Globe and Mail.