gold prices

Gold is King Among Investors

by Silvia Santacruz on February 20, 2009 · 1 comment

in Economy, Energy, International, Odds & Ends, Stimulus to Nowhere

Gold prices are skyrocketing—recently closing at over $1,000 an ounce, the highest in almost a year—while inflation fears continue rising and the dollar weakens.  This is the news that the media is echoing, quoting several analysts.  Many are blaming President Obama’s stimulus package for amplifying investors’ fears that his spending plan will only push the country deeper into recession.

Analysts’ forecasts, nonetheless, are a mixed bag.  Some analysts are calling the gold rush a bubble that can burst, as the dot-com and housing bubbles did, while others believe it can continue upward.

“Currencies are losing value and holders of currencies are losing confidence.  Gold may break through $1,000 and not look back,” says Ron Goodis, retail trading director at Equidex Brokerage Group Inc. in Closter, New Jersey, according to Bloomberg.  Read Gold Tops $1,000, Highest Since March, as Global Equities Slide

On the other hand, Przemyslaw Radomski, editor of Sunshine Profits, warns that Precious Metals and Corresponding Stocks may Fall in a Few Days.

“Since my previous essay on market timing was posted [Feb. 11], gold gained over $100 and silver gained over $2. These levels are substantially higher than when I suggested getting back on the long side of the precious metals market.  This rally has taken gold almost $200 higher within one month, so it is natural for one to expect at least a modest pullback from here,” Radomski said.

But as everything in economics, gold prices in a free market follow the forces of supply and demand.

“In a free market, increasing demand and rising prices provide a significant incentive for producers to increase the supply of an item.  And that’s usually how it works.  But that’s not what is happening in the gold market.  Demand is certainly increasing.  According to the United States Geological Survey, the demand for gold reached 1,133 tons in 2008, an 18% increase from the previous year.  In dollar terms, this represented a 51% increase to an all-time record $31.8 billion, “writes Jon Herring in his article Peak Oil… What About Peak Gold?

Meanwhile, the global supply is limited.  The industry has only discovered one significant deposit in the last 15 years: that of Aurelian Resources—now owned by Kinross Gold Corporation (NYSE:KGC, TSX:K)—with its Fruta del Norte gold-silver discovery in the Cordillera del Condor, in Ecuador, also known as the “gold dinosaur.”  If investors deem gold to be king in this environment, then Ecuador may provide them with their T. Rex.

Skyrocketing gold prices have also ignited the stock values of the four largest gold producers at the time of today’s 4:00 p.m. close.  Newmont Mining Corporation (NYSE:NEM) gained 7.21%, Anglo Gold Ashanti Ltd. (NYSE:AU) was up 6.36%, Barrick Gold Corporation (NYSE:ABX) earned 1.23%, and Gold Fields Ltd. (NYSE:GFI), up 4.46%.

Another factor that can influence gold prices is that most new worldwide discoveries are made by junior exploration companies—those with funded through equity financing, sometimes with less than $50 million—that combined have poured $12.6 billion into global exploration activities in 2008, according to the Metals Economic Group.  42% of this investment was focused on gold discoveries.

Inflation Fears Propel Gold Prices

by Silvia Santacruz on February 19, 2009

in Economy, Energy, Stimulus to Nowhere

As the Dow Jones Industrial Average approached record lows, gold prices shined on a seven-month peak, on Tuesday.  Details of President Obama’s new stimulus package catapulted inflation fears causing investors to hurriedly divest out of their portfolios, dumping company stocks and demanding more gold – considered a safe haven asset – according to Bloomberg.

Gold rose for a second straight day on speculation the recession will deepen, boosting the appeal of the precious metal as a haven asset.

In fact, from some investors’ perspective, the stimulus package won’t help the American recession.  As AP reported in its article Gold Prices Soar as Dow Takes a Dive:

If it stimulates anything, it’s going to stimulate gold, said Peter Schiff, president of Euro Pacific Capital, of the President’s plan.  As the government pumps billions of dollars into the financial system, analysts expect inflationary pressures to resurface.  The more inflation there is, the more attractive gold is, Schiff said.  Ultimately, you’re going to see much bigger upward moves in gold when the dollar starts to collapse.

Besides gold traders, or jewelry owners, gold producers are on the winning team, since their market capitalizations are valued according to the size of their deposits (million of ounces) multiplied by the current metal prices.  Gold mining companies, then, may flourish in 2009 while the Dow Jones continues to dive.

Inflation may be an unintended consequence of the President’s spending-focused plan, but investors’ opportunity to invest in the mining sector may just be a silver – or gold – lining in an otherwise cloudy setting.