Is $1,141 Gold Still Cheap?
The Dynamic Wealth Report
November 20, 2009
by Corey Williams, Editor
Gold prices are at all time highs. An ounce of gold closed at
$1,141 yesterday. With prices so high, some investors are wondering - is
it still a good time to buy gold?
The short answer’s yes. (And I’ll tell you my favorite way to profit
from rising gold prices in a minute.)
Gold will continue to increase in value because it’s in a new bull
market. Let me explain…
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For US investors, it’s obvious gold prices are rising in terms of US
Dollars. But you’re probably also aware the US Dollar continues losing
value versus other major currencies. And when the US Dollar is falling,
commodities traded in US Dollars tend to rise. They become cheaper to
foreign investors who are buying in other currencies.
At first glance, you may think the rise in gold is strictly tied to the
fall of the US Dollar. And if gold’s going up just because the US
Dollar is in a bear market, then I wouldn’t be very bullish on gold. But
there are other reasons.
As with any commodity, gold’s price is all about supply and demand.
Demand for gold as an investment is sky rocketing. Investors are
flocking to it as a hedge against economic uncertainty and inflation.
Why the new demand from investors? Gold is very easy to own today.
Central banks and institutional investors always had the capability to
buy gold. But now, individual investors have an easy way to own gold.
This is the first major recession the world’s gone through since the
introduction of gold Exchange Traded Funds (ETFs). As you know, these
ETFs buy and hold physical gold. By purchasing a gold ETF, you get to
own a piece of the stock-pile. These ETFs are a huge new source of
demand. All the demand is being driven by individual investors who
previously didn’t have access to easy ways to buy gold.
Just look at the SPDR Gold Shares (GLD), it has $41 billion in total
assets. Many of its investors are individuals who didn’t have the
ability to easily own gold in the past. This is truly a new source of
demand the markets have never seen before.
Now on the flip side of demand is supply. (And this is where the biggest
money is yet to be made in gold.)
Supply is under pressure because it’s becoming more difficult to find
new gold deposits. New major gold deposit discoveries have fallen to
under 15 million new ounces a year for the last ten years. This is a
major shortfall compared to the 40 to 60 million new ounces discovered
per year throughout most of the ‘90’s.
As new discoveries become harder and more expensive to find, actual gold
production has fallen. In fact, production peaked in 2003 and has fallen
in each of the last three years. The large gold producers are depleting
their known reserves (un-mined deposits) faster than they can replace
them.
A large part of the job finding new gold deposits has fallen to the
smaller mining companies. And this is where the biggest potential
remains in the gold market – ‘junior’ miners finding new gold deposits.
There’s no strict definition of a junior miner. But they are generally
smaller companies with a market cap under $1.5 billion and produce less
than 300,000 ounces of gold per year.
One junior miner I like is Golden Star Resources (GSS). They’re in a
great position to profit from rising gold prices.
Golden Star recently reported record quarterly gold sales of 107,000
ounces. That was good enough for a 45% increase over third quarter ’08
and a 9% increase from the previous quarter. Their average sale price
for the quarter was $967.
Now, the company’s currently operating at a loss but that should change
as gold prices continue to rise, new deposits are discovered, and
production increases.
And new deposits are being discovered. Management increased their
exploration budget in 2009. The result is a significant increase in
reserves and resources… with more to come in ’10.
One advantage of being a junior miner is being a target for larger
companies. Anyone who invests in junior miners knows there’s always a
potential for a larger company to buy them out at premium prices! And
now with gold prices jumping, that likelihood’s increasing.
As supply and demand continues painting a picture of rising gold prices,
the junior gold miners’ new discoveries become more valuable every day.
I expect Golden Star to outperform the larger gold miners and gold
itself. Gold’s still a bargain, especially when it comes to the
potential of the junior miners’ new discoveries.
• Whole Foods Market (WFMI) was upgraded by BMO
Capital Markets this week. They now have an outperform rating on the
stock. The recent pullback has made the shares more attractive as the
company continues to hold costs in check.
• Hot Topic (HOTT) was downgraded to underweight by
Piper Jaffray. Third quarter profits were down and Q4 earnings are
expected to come in lower than analysts’ expectations.
• Stifel Nicolaus started coverage on Anheuser-Busch InBev
(BUD) this week with a buy rating. The beer maker has slashed costs by
selling assets this year and is ready to launch two new products this
year.
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