Why Gold?

by Sean Brodrick and Kevin Kerr

A pullback like we’ve seen recently is a great time to pick up more gold and gold mining stocks. But buying individual stocks can be scary, because stocks can blow up. So, if you want to be more cautious AND have exposure to sector leaders, you can buy an ETF that holds a basket of gold/silver miners/explorers.

At the same time, many people feel they need exposure to gold and silver, but some folks don’t want to go through the hassle of buying and storing physical metal. I’m a big fan of owning physical metal, but there’s nothing wrong with using a gold fund or silver fund for a trade.

Indeed, if you’re not buying it for the long-term, using a fund to trade gold makes sense, because you don’t have to pay the high commissions you get tagged with in physical bullion.

Now, is this a good time to own precious metals and miners? We think so. We’ll give you three reasons why …

Reason #1: Gold Is a Tiny Part of Most Portfolios. This is one reason we know the big bull market in gold has yet to start. Gold and gold miners are just abstract concepts for most investors — according to recent estimates by Casey Research, less than 5 percent of Americans own gold or gold mining stocks. Meanwhile, U.S. government statistics from 2010 show that 55 percent of American homes have three or more TV sets.

When Americans worry less about the boob tube and more about real money, THEN we might see the bull market in gold kick into gear.

Reason #2: China Is Just Getting Started in Gold Investing. For decades, India, with its 1 billion people, was the world’s top consumer of gold. But that’s changing. In the first quarter of 2011, China overtook India to become the world’s biggest market for gold investment, according to the "Gold Demand Trend Report" from the World Gold Council (WGC).

The report indicates that Chinese investors purchased a total of 90.9 tons of gold bars and coins in the first quarter, which is twice the amount as the same period last year and higher than India’s 85.6 tons. In terms of the demand for gold investment, China is also 2 percent higher than India’s 23 percent.

In the first quarter of 2011, China’s total demand for gold was 981.3 metric tonnes; the demand for trading gold bars and coins rose by 52 percent. Gold investment demand in China is likely to top a record 200 metric tonnes this year, the WGC said, up from 187 tonnes last year.

China’s “investment demand has picked up exponentially,” according to Albert Cheng, the Far East managing director of the World Gold Council.

India’s no slacker — its year-over-year consumption is rising. In fact, the recent slump in gold prices stoked India’s gold purchases, helped by better-than-average harvests and the start of the Indian festival season. India’s gold imports are expected to rise more than 4 percent to 1,000 tonnes. So now we have two countries with more than a billion people each who are charging into gold.

Reason #3: Gold Miners Are Cheap. TD Securities recently issued a chart tracking the price-to-net asset value of the NYSE Arca Gold Bugs Index over the past three years …

By this measure, gold companies are dirt-cheap. Now, one of two things could happen — the price of gold could fall a lot, or the price of these companies could go higher. Which do you think will happen?

Yours for trading profits,

Sean Brodrick and Kevin Kerr

Sean Brodrick and Kevin Kerr are the editors of Global Resource Hunter, a monthly newsletter designed to help you ride the commodity supercycle — an ongoing surge in price of food, energy, metals and more.