Back in 1969, when Simon & Garfunkel recorded “Bridge over Troubled Water” the duo had a gut feeling that this song was going to make a very big splash. And they were right, as their recording went on to become a number-one hit (staying atop the charts for six weeks) – while being covered by literally dozens of other singers.
Like Simon & Garfunkel, investors entering the gold market around 2001 have also scored a smash hit. Since then – quite simply – gold has performed in spectacular fashion. Even in 2008, when fears of a global financial meltdown drove virtually every asset class into the ground, gold alone held its relative value, actually rising that year by almost 5%.
And the best news? It’s an odd’s on favorite that we are still early in what could prove to be an epic precious metals’ bull run. Says Doug Casey, who wrote one of the top selling investment books of all time: “The easy money in precious metals and the mining stocks has been made, but the big money lies ahead.” With so many other investments looking questionable and the world economic situation still unclear, this “metal of kings” can provide the savvy investor with a bridge over troubled water. For peace of mind, look at gold (and silver) as providing insurance first; profit second. Why is the Case for Gold so Compelling?
Central Banks have Become Net Buyers
Between 1999 and 2002, England’s central bank sold two-thirds of its gold reserves at almost the exact bottom of what turned out to be the end of a 20 year bear market. The december global holidays official who squandered this portion of his country’s monetary legacy was later to become Great Britain’s Prime Minister – and lend his name to what is known in financial circles as “The Brown Bottom.” A few years later, Canada (also unwisely) followed suit, getting rid of almost its entire reserve of gold.
But it now appears that central bank thinking has changed. For the first time in over 22 years, they have actually become net buyers – led in the fall of 2009 by India’s purchase of over 200 tons of gold. Most of these officials are once again concluding that the yellow metal’s strong financial performance makes it a useful counter-weight to the swings of the U.S. dollar, which has been steadily losing value for a number of years. While gold is no longer the foundation of the international financial system, it is still considered by central banks to be a crucial reserve asset. Rumors are abuzz that China, as well as a number of wealthy Middle Eastern nations have been quietly scooping up what little gold the International Monetary Fund (IMF) has been offering for sale.
Supply is Down
According to the World Gold Council, gold’s popularity continues to surge, driven by increasing industrial and jewelry manufacturing use, in addition to very strong investor demand – from individuals and institutions.
Also, producers have accelerated the unwinding of their hedge books. Years ago, mining giant Barrick Gold pre-sold much of its production forward under contract, promising to deliver at hundreds of dollars an ounce lower than where the metal trades today. In a better-late-than-never development, it recently decided to buy back all of its hedges – in the process, suffering a loss of several billion dollars…and adding to global gold demand.
The data strongly implies that available stockpiles will not keep pace with demand in coming years. Gold’s global production peaked in 2002. Several of the world’s largest mining companies expect further declines in production next year, and are in a scramble to increase reserves through the acquisition of new mining properties. South Africa, once the world’s largest gold producer (now supplanted by China), mined its lowest amount of gold since 1922 – and its overall output is down 72 percent from its 1970 peak. Whereas China and Russia have become a major force in gold production, they also seem inclined to hold onto most of it – adding these precious ounces to their own reserves.
Importantly, no new major mine supply is expected in the near term. In general, it takes more than a decade to acquire, finance, build and staff a mine and commence production. Thus, the supply/demand imbalance is expected to continue – and is likely to increase for years to come.
Most of the new gold discoveries in recent years have been of the low grade/bulk tonnage variety, often in remote locations – sometimes near environmentally-sensitive areas. The normal procedure with these deposits is to dig up and crush thousands of tons of ore-bearing rock, then apply chemicals in a “heap-leach” process to get out the gold. The yield from this procedure is often only a few grams per ton! Compounding the supply problem is an ongoing global shortage of trained geologists, miners, diamond drills and mining equipment.
While Demand is Up…
Demand, on the other hand, continues to increase in the face of the newfound prosperity and increased disposable income being freed up by the Asian economic boom, particularly in China and India – three billion people adding fuel to a long-term shift in consumption demand.
Throughout the developing world, gold is the most liquid, efficient and widely accepted form of exchange and the best store of value – especially in rural areas that lack access to banking services. Jewelry is coveted in the developing world, where it functions as both adornment and savings. It is often the only asset a Muslim or Hindu woman is culturally permitted to own, and therefore may be her only form of protection against financial adversity. Additionally, the dowry concept is alive and well in India today, where gold is commonly transferred from the family of the bride to the groom.