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Today, I’d like to tell you about the core of my investment strategy for 2008 — precious metals. It’s a big topic, so I’ll focus just on gold.
Gold logged big gains in 2007 — up about 30% for the year. I believe the yellow metal should do even better in 2008.
In fact, gold’s big breakout could come sooner rather than later. Take a look at this chart of gold through last week.
I don’t want to get too technical, but my charts are giving me a minimum target on gold of $915 per ounce.
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And we could get there a lot faster than most of Wall Street thinks possible. Indeed, I wouldn’t be surprised to see gold crack the $1,100 barrier in 2008, and probably go higher than that. Let’s look at a few reasons why …
Force #1: Tightening Supply-Demand Outlook For Gold. Gold comes from a bunch of sources. Mines are one. There’s also central bank selling and sales of gold scrap. Another source is hedging, or forward selling of gold production by miners — that’s different from regular production in that it locks in future sales of mine production at a set price and helps price stability.
Taken together, these make up the total supply of gold. And despite soaring prices, the total supply of gold is barely keeping up with demand.
|
2003 |
2004 |
2005 |
2006 |
2007 |
|
|
Total Supply (metric tonnes) |
4,147 |
3,360 |
3,910 |
3,557 |
3,496 |
|
Total Demand (metric tonnes) |
3,220 |
3,495 |
3,726 |
3,386 |
3,678 |
|
Surplus/(Shortfall) |
927 |
(135) |
184 |
170 |
(182) |
|
Source: World Gold Council data |
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And what this leads up to is a widening gap between supply and demand …
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The numbers for 2007 are a projection using the first three quarters of data collected by the World Gold Council. Exploding consumer populations in emerging markets like China and India are pushing demand for gold higher and higher.
But there is also the relatively new force of investment demand …
Force #2: New Demand From Gold Investment Vehicles. Worldwide demand for gold as an investment rose to 138 metric tonnes in the third quarter, up a stunning 618% from the 19.2 tonnes in the year-earlier period!
Exchange-traded funds that hold physical gold — GLD and IAU in the U.S., GOLD in Australia, GLD in Johannesburg, GBS in France and Britain — held approximately 741 metric tonnes of gold at the end of November — up from just 39.4 tonnes in 2003.
The huge rush of gold buying by the ETFs is helping drive the market — the easier it is for investors to buy gold, the more they buy, and the higher the price goes.
But the big buying by gold ETFs in the industrialized world is just the beginning. The real opportunity is going to come when precious metal ETFs and mutual funds open up in China and India.
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Traditionally, gold buyers in those countries accumulated gold in jewelry form. But there’s evidence that is already changing. India already has precious metal ETFs and China shouldn’t be far behind.
That means two countries with a combined population of over 2.4 BILLION people will suddenly be able to buy gold with ease!
And both China and India have middle classes that number more than 300 million people. Clearly, the effect of gold fever on prices could be enormous.
You can see that a large gap is starting to develop between supply and demand, and if it weren’t for central bank selling and de-hedging by gold producers, it would be even worse.
When you look at mine supply alone, global gold production fell to a 10-year low of 2,477 metric tonnes in 2006, according to Gold Fields Mineral Service (GFMS).
In fact, there are some indications that supply could come under real pressure in the months ahead …
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Force #3: Global Mine Output Is Falling. Global gold production was down a full 3.1% in 2006 and was nearly flat in 2007.
Barrick Gold CEO Gregory Wilkins recently told the press:
“There’s not much gold out there.”
In fact, Barrick expects gold production will fall 10-15% below market expectations over the next three to five years!
There are some places where gold production is rising. For example, China will probably overtake the United States as the world’s second-biggest gold producer this year. Production could rise 8% to a record 260 tonnes this year from 240 tonnes in 2006, according to Hou Huimin, deputy head of the China Gold Association.
But for every success story, there are more mines that are drying up. South Africa is the gold mining kingpin, but probably not for much longer. South African production — 134 tonnes in the first six months of 2007 — has dropped by almost a third since 2002 as mining companies have been forced to dig deeper. In fact, South Africa’s output is down to its lowest level since 1922.
One reason why production isn’t ramping up with gold prices is there are fewer mining companies. The 20-year bear market in gold forced many marginal mines to close. And over the past 15 years, a wave of mergers has created a bunch of mega-sized gold miners.
While the top five each produce between 3.5 million and 7 million ounces every year, they’re more likely to concentrate on working their existing mines and buying up other mines, and focus less on new exploration.
These are just several of the forces that will help power gold into the stratosphere during 2008. And one of the ways you can profit from gold’s long-term trend higher is through ETFs …
Prospectors Panning
For Gold With ETFs
Investing in precious metals got a whole lot easier when ETFs came along.
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Gold, Silver and Metals ETFs
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|
Fund Name |
Symbol |
Total Expense Ratio |
|
iShares COMEX Gold Trust ETF |
IAU |
0.40 |
|
iShares Silver Trust ETF |
SLV |
0.50 |
|
streetTRACKS Gold Shares ETF |
GLD |
0.40 |
|
PowerShares DB Gold Fund ETF |
DGL |
0.50 |
|
PowerShares DB Silver Fund ETF |
DBS |
0.50 |
|
PowerShares DB Precious Metals Fund ETF |
DBP |
0.75 |
There are a bunch of gold and silver ETFs. They all seem similar on the surface, but that’s not the case. The iShares and streetTRACKS funds hold physical metal.
PowerShares, on the other hand, structures its funds differently. They track the performance of a fully collateralized futures position, meaning they capture changes in the spot price of the underlying metal plus any “roll yield” and interest income.
All things being equal, I believe you might just go with the fund that has the lowest total expense ratio.
For example, there’s nothing wrong with the streetTRACKS Gold Shares ETF (GLD), and a lot right with it. It will track gold closely going forward. The GLD and the Barclays iShares Comex Gold Trust (IAU) are fixed at 1/10th the price of gold, minus a small amount to account for fees.
That is, if gold is trading at $830 an ounce, you can buy the GLD or the IAU for about $83. They are backed up by gold bullion in a vault.
For more details, read:
The Barclays iShares Comex Gold Trust (IAU) here …
http://www.ishares.com/product_info/fund/overview/IAU.htmThe StreetTRACKS Gold Shares (GLD) here …
http://streettracksgoldshares.com/index.php?noMsg=true
There are fees associated with gold ETFs, but they’re small, and you can’t beat the convenience. So, go ahead …
Buy The Dips And Hold
On For A Wild Ride
I’ve given you three reasons why gold will go much higher in 2008 — but that’s just scratching the surface!
We haven’t even touched on the next leg down in the U.S. dollar, petrodollars pouring into gold, geopolitical risk, or other forces that could send the yellow metal spiking higher.
And yet, nothing goes up in a straight line. I expect we’ll see pullbacks in gold’s journey to $915 and beyond — and some of those pullbacks could be sharp.
THAT is precisely when you want to buy!
The fundamental forces pushing gold higher aren’t going away, so you can buy gold now, or wish you had.
Good luck and good trades,
Sean
About Money and Markets
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