The Real Story of the
Rise of the Price of Gold
Excerpt from
Daily Buy-Sell Adviser
"Gold prices have been rising to fill the void left by battered currencies, says this Canadian analyst, who ponders how investors can benefit.
Things just aren't the same anymore.
We have lived beyond our means for so long that we can't really get back to "normal," says one Canadian analyst.
Normal doesn't work no matter how much money we throw at it.
We had better get used to a new state of affairs, according to Ian McAvity's Deliberations on World Markets. And in that new state of affairs, gold is playing a larger and larger role.
Mr. McAvity lives in Toronto and writes for an audience that is made up of many American readers.
He describes how gold, abandoned by the powers-that-be forty years ago, has come back to become the refuge of choice for those who have lost confidence in the currencies of the western world.
He follows that up with a look at the future of gold and gold stocks in the months ahead, including the disappointing showing of Canadian miners.
In 1971, the Nixon administration in Washington needed to pump up the money supply in order to meet a growing list of obligations, not least of which were the bills for the war in Vietnam.
At the same time, foreign holders of U.S. debt, wary of America's debt and deficit spending, were exchanging more U.S. dollars for gold.
The solution was to cut the dollar loose from the gold standard and let the world's currencies float freely and determine their worth in relation to each other.
"While central bankers declared gold to be a useless relic," says Mr. McAvity, "market participants went back to gold as a historical base, as money without counter-party risk, and the major currencies lost substantial purchasing power in gold terms from 1971 to 1980."
Fast forward to the twenty-first century. The analyst publishes a chart that shows the "real story of rising gold prices" - the continuing loss in the value of world currencies.
While the mature economies of the G7 countries try to spend their way out of a major slump after bailing out their financial institutions, the rest of the market is opting for gold.
This is "an unfriendly major revaluation of the currencies of the dominant G7 countries that were increasingly living beyond their means and creating long-term debt to fund current consumption at the expense of the next generations," adds Mr. McAvity.
China and other developing nations have been accumulating trade surpluses as western consumers live on borrowed money, "eating their homes one brick at a time with the Asset Backed paper market enabling them to convert the most traditional family assets into an ATM machine."
Farmers know better than to eat the seed corn, says the analyst, but many Americans are consuming their homes and falling into debt that is far in access of their primary asset.
So when policy makers talk of "getting back to normal," they don't seem to recognize that "normal was an unaffordable, unsustainable trend unlikely to be seen again for a generation," states Mr. McAvity.
He repeats: "It's not the price of gold rising ... it's the integrity of paper promises evaporating that gold is reflecting."
But if gold continues to rise, the shares of gold stocks do not follow it up the charts. Studying his copious charts, Mr. McAvity gets a "twitching feeling" that "this bullish seasonal window for gold" may yield a big upward push before the year is out.
If gold were to push past the $1,260 peak to new highs of $1,400 or greater, this might "explode gold shares out on the upside."
He has noticed some "high profile players" building positions in two South African miners, AngloGold Ashanti (NYSE: AU) and Gold Fields (NYSE: GFI). AngloGold trades at $42.78 and yields 0.4 per cent on an $0.18 dividend. Gold Fields is at $14.32 and yields 1.3 per cent on $0.19.
Yet Mr. McAvity is not a big fan of the South African majors, despite the interest shown in them by people like hedge fund headliner Mr. John Paulson.
He also assures his readers that his bullish gold projections are still more of a "hunch" than a "bet the farm type of suggestion." The market could go back down first, and "I would be inclined to tread carefully until a convincing metal price breakout had lifted the miners," he adds.
Either way, he thinks an exchange-traded fund might be a better bet for investors. Market Vectors Junior Gold Miners ETF (NYSE: GDXJ) is made up of about 60 junior gold stocks "who are likely takeover targets for the majors who will need to replace the reserves they are mining."
Mr. McAvity says he can see this ETF outrunning the major miners "with some conviction." It trades at $30.28, a dollar below its May high.
Unfortunately, he remarks, "Canadian gold bugs" are among the most frustrated. The Canadian dollar index of gold stocks is still around the peak it reached in 2006 when a gold rally topped out at US$732 an ounce.
Since then, the major Canadian gold miners have expanded their market caps with expensive mergers and acquisitions, he says, but "they certainly haven't done much for their shareholders."
This analyst is confident that the price of gold will keep on rising to fill a hole left by currencies battered by debt. For investors, the challenge will be to spin some real profits out of that golden future."
Source: www.DailyBuySellAdviser.com a free website maintained by the Investor's Digest of Canada, 133 Richmond St., W., Toronto, ON M5H 3M8, 1 year, 24 issues, $137. This site features a digest of leading advisory letters from Canada and around the world. Readers can also receive Buy, Sell and Hold advice on 1,000 Canadian companies plus earnings estimates. You will also get the "Strongest Recommendations of the Month." To get the "Key Ratios" on over 1,100 Canadian companies (1.) Go to www.DailyBuySellAdviser.com. (2.) Click on "Special Reports" in the navigation bar at the top of the page. (3.) Click on "Key Ratios" for detailed analysis on Canadian companies.
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