Is $1,141 Gold Still Cheap?

| November 20, 2009 | 0 Comments

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…

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.

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Category: Currency Trading

About the Author ()

Corey Williams is the editor of Sector ETF Trader, an investment advisory service focused on profiting from ETFs and the economic cycle. Under Corey’s leadership, the Sector ETF Trader has become one of the most popular and successful ETF advisories around. In addition to his groundbreaking service, Corey is the lead contributor to ETF Trading Research, where he shares his insights about ETFs and financial markets on a daily basis. He’s also a regular contributor to the Dynamic Wealth Report and the editor of one the hottest option trading services around – Elite Option Trader.

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