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Global markets are whipsawing right now as the Federal Government tries to put out a fire in the credit markets with a flood of liquidity. But the rescue plan is failing. As a result, credit markets are spiraling into a deep freeze, threatening to destabilize the U.S. dollar.
Investors are running for cover … because it sure beats jumping out the windows. Cash is good, to be sure. But if you’re looking for your own golden parachute, consider my favorite yellow metal.
After all, both the U.S. and Europe are throwing paper money at the credit market problems. That makes gold look better and better.
Indeed, while most commodities sank on Monday as investors fretted about a global economic slowdown, gold marched upward.
I believe gold’s rally is going to continue. It won’t be a straight line, of course, but the yellow metal could go much, much higher in the next few months. All told, I see four forces lining up that could drive the metal higher …
Force #1
A Shortage of Gold Coins
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| The U.S. Mint ran out of 1-ounce Buffalo gold coins … |
Last week, the U.S. Mint temporarily halted sales of its American Buffalo 24-carat gold one-ounce bullion coin because it simply ran out of inventory — selling 164,000 24-carat gold coins this year, which is nearly 30,000 more than during all of 2007.
You’ll also remember that the Mint had to suspend its sales of its one-ounce American Eagle gold coins on August 15, then started them again, but rationed them.
I just talked to Patrick A. Heller, owner of Liberty Coin Service in Lansing, Michigan. He says his coins are flying out the door. His firm is doing huge volume, and nearly every customer is a buyer. According to Heller,
“Demand for physical gold and silver has been so strong that many coin and bullion dealers and wholesalers have had difficulty having any merchandise in stock for immediate delivery. Premiums are up sharply, and we have a number of customers we have to turn away — they were interested in products we couldn’t get in a reasonable amount of time.”
Never mind the shortage of US Gold Eagles or Buffaloes. Mr. Heller says just try getting your hands on the South African gold coin, the Krugerrand.
“We see occasional pieces,” Mr. Heller said. “We don’t know when we’ll ever see them. Last week, we had a customer finally sell us a number of Krugerrands, and we filled all the orders we’d had waiting since August. We had 100 coins left over after we filled back orders and we sold those out in 30 minutes!”
Mr. Heller can fill most customers’ orders after a wait of days, sometimes weeks. But it will cost you. A 1-ounce US Gold Eagle goes for 9% over the gold spot price … if gold is at $850 an ounce, that’s a premium of $76.50 per coin!
The best bargain in gold bullion coins right now is the Mexican 50-peso, Mr. Heller says.
A representative of another gold dealer, Ila Joshi at American Century Brokerage, a division of American Century Investments, says she has seen an increase in volume in the last year and especially in the past six months. She’s had reports of shortages by wholesalers in 1-ounce gold Krugerrands, too.
What this scarcity indicates is that the physical demand for gold is not being met by supply. And in our economy, the way we get supply and demand in balance is by price.
Force #2
Gold ETFs Also in Hot Demand
Last week, I told you how gold ETFs are now one of the biggest drivers of gold prices. And the amount of gold they hold continues to soar.
The biggest gold ETF, SPDR Gold Shares (GLD), now holds over 724 metric tonnes (23.3 million ounces) of gold — near a new record.
Together, all gold ETFs hold 879 metric tonnes. Only six countries hold more gold than that, putting these combined ETFs ahead of economic heavyweights including Japan, China, the European Central Bank and Russia.
So we’re seeing strong demand for gold in both coins and bullion.
Force #3
The Easy Gold Has Already Been Found
Global spending for the exploration of nonferrous metals (gold, silver, and other non-iron metals) hit $10.9 billion last year — up from just $5.2 billion in 1997 and $1.9 billion in 2002.
However, the share of money spent on gold exploration is FALLING, down 42%, its lowest piece of the exploration pie since 1989. Last year was also the eighth year in a row that gold had accounted for less than half of global exploration budgets.
Why is that happening, with gold over $800 an ounce? Because the easy gold has been found, that’s why. Many new deposits are smaller and lower-grade, and not worth investigating after the initial find.
Look at Gold Fields, Africa’s second-largest producer of gold. It just cut the minimum output it demands before investing in new mines by 60%! Gold Fields will now consider deposits as small as two million ounces that yield about 200,000 ounces a year, compared with its previous requirement of five-million-ounce deposits yielding 500,000 ounces.
This is great news for small-cap miners that weren’t quite big enough to be swallowed up by the big boys. And it’s also bullish for prices. Heck, even when prospectors do find gold, it can take seven to ten years to bring a new mine on line.
This gap is your window of opportunity — to buy the best mining stocks with the biggest piles of gold to feed the world’s nearly insatiable hunger for the yellow metal.
Force #4
The U.S. Dollar Is on the Brink!
Right now, the U.S. dollar is rising because investors are avoiding risk and foreign currencies like the euro are dealing with even worse problems.
But eventually, all our country’s crushing debts — trillions of dollars in bad bets — will come due.
The fates of empires are often sealed by snowballing debts, compounded by expensive wars. We saw it happen to the Soviet Union and to the British Empire before them. If the U.S. continues on the road it is on now, it may very well happen to us.
Now, we keep our dollar afloat by going around to the Chinese and Saudis, tin begging cup in hand. China buys U.S. Treasuries by the bucket load to keep its currency pegged — as of July, China held $518.7 billion in U.S. Treasury bonds, more than half its estimated $1.2 trillion in reserve assets.
The Wall Street Journal goes so far as to say that the “success of the pending rescue of the U.S. financial system probably depends as much on the central banks of China and the Middle East as on Congress and the Federal Reserve.”
But at some point, the Chinese and Saudis will get sick of underwriting Uncle Sam’s lifestyle.
Where will they put their money? I think gold is the answer.
China has less than 1.2% of its reserves in gold. This is extremely low by international standards. If China starts to move more of its reserves into gold — a prudent move considering how the U.S. is playing chicken with the dollar — that alone could send gold prices soaring.
Meanwhile, the six oil-rich members of the Middle East (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates) have a similar problem.
They’re raking in money from oil products — expected to soar to a new record of $562 billion this year, according to the Center for Global Energy Studies. And the last place they’re going to want to put that money is dollars.
Gold is more central to the cultures of the Middle East … commonly used as a storehouse of wealth in the good times to get through the bad times. Just a small fraction of those oil revenues rushing into gold markets should be rocket fuel for gold prices.
Your Golden Parachute — How to Ride
The Coming Rally in Precious Metals
The new rush into gold isn’t taking place in a vacuum.
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| Gold bullion bars are another way to get a stake in the yellow metal. |
It’s happening in the context of a meltdown in the global credit markets … massive shifts in the global economy … and the declining value of the money in your wallet.
Just one of these forces would be enough to keep gold high and move it higher. Together, they’re working like booster rockets all firing at once.
That’s why I believe the sky’s the limit on gold. Here are three ways you can play the metal …
Vehicle #1
Bullion bars or coins
There are many dealers that will sell you gold and silver … if they have the bars or coins on hand, anyway. Along with the previously mentioned Liberty Coin Service and American Century Precious Metals, there are plenty of sites that will sell you coins and bars online — Kitco.com, American Gold Exchange, BullionDirect.com, and more.
Many of these dealers have inventory lists online that show you what they have in stock and at what price. The good ones will also show you the percentage you’re paying over the spot price of gold or silver.
Just remember, I’m not endorsing any particular dealer, and it’s always “buyer beware.” You might want to ask your friends who they’ve used successfully to buy coins and bars.
As for “rare” gold coins — coins with historical value — they could work for you, though personally, I stay away from them. I figure if things get so bad that I want to sell my gold or silver, the historical value might not matter to the buyer.
Vehicle #2
Pooled and Holding Accounts
American Century Brokerage offers a variation of these, as do other dealers, but for more information you can check out the pooled and holding accounts description on Everbank’s website.
These are different from holding the GLD — in a pooled or holding account, you have a piece of specific bars of gold or silver.
One thing I don’t like about this product is you don’t physically get the gold. Also, in a holding account, you’ll end up paying a storage/custodial fee.
Vehicle #3
Bullion Funds
There are two gold exchange-traded funds — funds whose value is pegged to the price of gold bullion, minus nominal fees and expenses.
These are not shares of stock, but they trade like stocks, with all the advantages of being able to buy or sell in liquid markets at almost any time.
Importantly, unlike some other “gold” ETFs, the two I’m talking about hold physical gold. Those ETFs are the SPDR Gold Shares (GLD) and the iShares COMEX Gold Trust (IAU). They trade at roughly 1/10th the price of gold, minus a small amount to account for fees.
So if gold is trading at $900 an ounce, you can buy the GLD or the IAU for about $90. In fact, you could say that a gold ETF is one of the easiest ways to buy gold.
Because it’s so easy, gold ETFs can see enormous flow of investor funds as gold fever heats up. So they’re bound to be the most liquid vehicle in the marketplace, good both for a long-term buy-and-hold strategy … and for trading strategies.
You can download a prospectus for GLD from the Web or contact your broker for more info.
Good luck and happy trading!
Sean Brodrick
P.S. I’m putting the finishing touches on a new special report called “Your Golden Parachute for 2009.” It names the best and most powerful vehicles you can use to play the gold move to the hilt. It will be coming out in a little over a week, but I suggest you reserve your copy right now. Not only will you be among the first to receive my picks, but you’ll also get a valuable pre-publication discount.
My exclusive special report, plus a minimum of four follow-ups over the course of the year, is normally priced at $199. Order now, and it’s yours for only $99. Are profits guaranteed? Of course not. As with any investment, you CAN lose money. But I’m convinced each of my picks is loaded with value and on the verge of blast-off.
Gold had a great 2007, and 2008 has been rocky … so far. But those 2007 gains could pale when gold makes its next big move … a surge that should take it to $1,000 … $1,500 an ounce and beyond!
If you’re interested, call 1-800-291-8545. Just say you want “Your Golden Parachute for 2009”, plus all my follow-up reports on all my picks. Or, order online here.
About Money and Markets
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Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Tony Sagami, Nilus Mattive, Sean Brodrick, Larry Edelson, Michael Larson and Jack Crooks. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Kristen Adams, Andrea Baumwald, John Burke, Amber Dakar, Dinesh Kalera, Christina Kern, Red Morgan, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau and Leslie Underwood.
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