Not to sound alarming, but this is a good time to invest in gold.
Then again, it’s hard not to sound alarming as looming inflation and currency devaluation have investors wondering how to protect the value of their portfolios. As it has in the past, gold is emerging as a go-to currency. At the same time, the supply of gold cannot keep up with demand and there is a commonly held view that in the next 12 months, gold could crack the $2,000 mark.
There are a number of ways to own gold – bullion, gold-backed exchange traded funds, and equities. If you can find well-managed companies operating in stable countries with a clear path to growth, stocks provide the most leverage. But before we zero in on a number of equities, it’s useful to understand why it’s a good time to go for the gold.
Let’s start at the top. Frank Giustra, the Vancouver-based entrepreneur who founded Wheaton River, which evolved into Goldcorp Inc. G-T, the world’s number two gold producer by market value, recently revealed why investors should own gold.
“Think of gold as the chicken soup for all the world’s ills,” he told Forbes magazine.
Mr. Giustra still produces gold through a number of companies, including New Gold Inc. NGD-Tand Etruscan Resources Inc. EET-T , which is drilling on the new gold-mining frontier -- the West African nation of Burkina Faso. He outlined the factors influencing gold’s strength: supply and demand, stock market performance, interest rates and geopolitics. But he zeroed in on two: the high level of bank reserves that will drive inflation, and high levels of sovereign debt caused by record budget deficits. Historically, he said, both outcomes have been a boon for gold prices.
FOR OPTIMISTS, TOO
Mr. Giustra’s outlook is based on a relentlessly pessimistic outlook. But you don’t have to be a pessimist to like gold. Carmel Daniele is the London-based founder of CD Capital and launched the CD Private Equity Natural Resources Fund in 2006 to take advantage of the “commodity super-cycle”, her term. She’s a former group executive at Newmont Mining NEM-N, and was involved in the $24-billion (U.S.) merger between Franco-Nevada, Newmont and Normandy to create the world’s largest gold company.
In a recent interview with The Gold Report, she explained her belief that this super-cycle is driven by the urbanization and industrialization of 3 billion people in Asia, is 10 years in and has at least 20 years to run. Look at what China and India are doing, she suggested: “Securing limited resources around the world in order to continue to build out their empires”. She dismissed the current gloom as an annual thing. “Basically most people sell in May and go away.”
During this spring of uncertainty, however, she likes gold as much as Mr. Giustra, and believes that gold could get “really, really high”. “It could easily break through $2,000” if China , for example, starts to buy.
Ms. Daniele called gold a “psychological metal”, driven by more than supply and demand dynamics. “Basically when economies aren’t doing very well, and people aren’t feeling very optimistic, they tend to flock to gold.”
While people can always buy gold bullion, the storage problem always presents itself, prompting images of stuffing gold coins into mattresses. Other, more portable means of acquiring gold, are gold-backed ETFs and equities.
PICKS
Ms. Daniele likes equities because of the multiplier effect. “You see, if the gold price goes up, the leverage you get is just so much higher than just holding the gold bar itself,” she said.
