Over the ages, gold has come to be synonymous with wealth. In modern times it has become known as an inflation hedge and “investment insurance,” especially during times of inflation and geopolitical uncertainty.
After being in a 20-year bear market (from its market top of $850 in 1980 to its low of $252 in 2000), conditions are ripe in the marketplace for a gold bull market that could reach or surpass its old high. Aggressive investors should be investigating gold stocks. Why now?
According to many (if not most) gold market analysts, such as Bill Murphy of the Gold Anti-Trust Action Committee (www.gata.org), and sites that specialize on the gold market, the fundamentals for gold are more bullish than ever. In recent years, demand has begun to significantly exceed supply.
The shortfall has been filled from gold sales by central banks. Because of continued and growing demand both in the U.S. and abroad (most notably India and China), total worldwide annual demand is outstripping supply by anywhere from 1000–2000 tons (depending on whose estimates you believe).
Juxtapose this demand with current economic conditions (such as the declining value of the dollar and other paper currencies) and geopolitical instability, and it’s easy to see that gold, gold coins, and gold-related investments (such as gold stocks) show bullish potential.
Because gold does well in an inflationary environment, understanding inflation itself is important. Inflation isn’t the price of things going up; it’s the value of the currency itself going down. The reason it goes down in value is primarily due to the fact that the government can print money at will (“the money supply”).
When you significantly increase the money supply, you create a bullish environment for hard assets such as gold. Gold analysts such as Bill Murphy, Doug Casey, Jay Taylor, James Sinclair, and many others easily see the gold price hitting four figures in the not-toodistant future.
In that case, gold mining stocks would perform fantastically well (not unlike their heyday in the late 1970s). For conservative investors, consider the large, established mining firms such as Newmont Mining (NEM) or Gold Corp. (GG). For the more daring, consider junior mining stocks. Do your research with the Web sites mentioned in this segment.
A common practice in the mining industry in recent years has been the practice of forward selling (also called “hedging”). Forward selling is the process in which a company sells next year’s production at a locked-in price today. The benefit for the company is that it makes money even if next year’s gold price stays stable or goes down.
However, if gold rises next year, the company loses out on the potential profit. Since 2000, as gold went from $252 per ounce all the way to $439 in August 2005 (a 74 percent rise), most un-hedged gold companies saw their stocks double and triple in the same time frame.
In comparison, hedged gold companies either went up more modestly or not at all. Some companies even went bankrupt because of hedging.