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Gold Hits Record Highs. Will the Rise Continue?

July 21st, 2011 No comments

In the last several blog posts, we’ve discussed the numerous global economic factors creating demand for gold. On July 13, the price of gold for immediate delivery hit a record price: $1,567.70 an ounce. We normally price gold in U.S. dollars but gold also hit highs in other currencies including the Euro, Sterling (pounds), and the Rand (South Africa’s currency).

We believe there were three factors influencing this record rise.

ONE…The Federal Reserve in the United States released the official minutes from the last meeting of the Federal Reserve Board and the minutes pointed toward more of what the Federal Reserve calls ‘quantitative easing’ or QE. Don’t be fooled by the phrase or its abbreviation: QE is code for printing money to stimulate the economy. Unfortunately, QE means an increased risk of rising prices and investors use gold as a hedge against inflation.

TWO…Moody’s, the investment information service, downgraded Ireland’s debt to ‘junk’ status. When a major EU country like Ireland is close to defaulting on its debt, alarm bells start ringing, investors become worried about the European economy and when they’re worried, they buy gold.

THREE…A meeting of EU leaders was scheduled for Friday, July 15, to discuss the default of Greek debt. It seems it’s not a case of ‘if’ but ‘when’ or ‘how.’ Again, investors buy gold when there’s a risk of credit default and/or massive currency devaluation.

The rise in the price of gold on July 13 was the eighth straight day the price of gold rose. This had not happened since October, 1996. Michael Widmer, a Bank of America Merrill Lynch analyst told London’s Daily Telegraph:

“Gold will keep rising for the next five years, even if it has some crests and troughs. Those holding gold should hold on to it, while others should probably get their hands on it as it is going to be on an upward trend.”

Gold is up 11% in 2011. So is now a good time to buy gold? It’s certainly a mistake to buy gold or any commodity based on its daily or monthly performance. But the record price on July 13 is proof the analysts who follow gold are getting it right. These analysts have looked at the global economy and predicted increased demand. Couple this with tight supply and the price of gold continues to rise-and set records.

Let’s not forget-in 2008, gold analysts were labelled as slightly insane for predicting a gold price over $1,000 an ounce. It was trading at around $750 an ounce in July 2008. So gold has doubled since 2008 and it’s proved the analysts correct.

Nobody can predict the future and there’s always the possibility that investors who buy gold will lose money. However, for at least the last three years, analysts who follow gold have been right and buying gold has been a profitable decision.

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Serious Investors Buying Gold Mining Stocks

July 6th, 2011 No comments

In previous posts, we’ve noted the rise in the price of gold: 100% in two years. We’ve detailed some of the reasons for the rampant increase in global demand for gold. These include the weakness of the U.S. economy, inflation fears, and the voracious gold appetites of countries like China, India, and even Qatar. Oil producing countries want to buy gold and get rid of dollars—as the dollar continues to decline.

But there’s more to the increase in the price of gold than demand: there’s a supply problem. If you live anywhere near a jewellery store, you’ve probably noticed it’s no longer just a store selling watches, rings, pendants, and the like. It seems that every jewellery store has a massive ‘Buy Gold’ sign outside and newspapers are full of ‘We Buy Gold’ advertising. There’s even a social trend: gold parties. The host or hostess gathers some friends, tells them to bring some ‘spare’ gold and a local company provides champagne—then buys gold. Proceeds go to the host or hostess, the people at the party, and/or a charity.

Even with this ‘retail’ supply increasing, there’s not enough gold in the world to meet demand. And because gold is difficult to mine and the demand continues to increase, serious investors have been paying extremely close attention to gold mining companies. And with good reason.

  • Mining company Rio Tinto has provided investors with an average return on equity of 22.2% over the past three years.
  • Freeport-McMoRan Copper and Gold has major interests in gold mining and its stock price has climbed from US$28.30 to today’s price of US$53.50.
  • The Motley Fool’s website cited Newmont Mining as a ‘Dividend Standout’ as Newmont raised its dividend by 33%.
  • One of the most watched investors is Paulson and Company’s John Paulson whose hedge fund benefited massively from the 2007 U.S. mortgage crisis. Paulson recently increased its share holdings in gold mining company Barrick Gold by 125%.

Finding ‘fresh gold’ is expensive and arduous. A mining company has to find the gold, mine it, process it, then ship it. Mines are usually subject to strict environmental controls and can be remote. The costs to mine and process gold are extremely high. Gold mining companies would only be investing billions in existing and new mines if they felt confident the price of gold was going to remain steady—and increase.

Investors are increasingly confident that gold mining companies are making the correct decisions and investing wisely—again based on investor’s confidence in the stability of the gold price. The interest in gold mining stocks provides further proof that gold demand is likely to remain consistently strong for the next several years, making it an excellent time to buy gold to add to your portfolio.

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