GOLD!!! Why 2007-09 is going to be good.

At a time when most metal prices are falling, you might wonder why I would be advocating gold stocks. Well there are a number of reasons:
1. Gold prices have been bouyant after a long period of consolidation. I suggest its poised for a major move to $1100-1500. Much is made of the relationship betwen the gold price and USD, but the reality is that gold has tangible value in and of itself. It has a relationship with all currencies, not just the USD. The only reason that is not apparent is because gold is quoted in terms of USD. Of course, we have to consider the extect to which gold prices are growing of their own accord, and the extent to which they are growing because of USD weakness/strength. We can see from the following chart that gold is on an upward trend, and we should expect a price surge when the price breaks $US695/oz in coming weeks. The $720-730 price level widll be another resistance level. Once broken we should see alot of upward movement in gold prices.

2. Gold fundamentals look good: Gold prices have not risen as much as other metals since 2001. Jewellery demand has recovered as buyers have adjusted to higher prices (costs). Higher interest rates in alot of countries will be politically unpalatable in alot of countries, so expect our 'independent' central banks to go easy on monetary policy...thats to say they will be lagging so real interest rates should remain low.
3. Inflation is getting worse: Consider the world's 2nd largest miner - Rio Tinto - it just reported that cost increases grew as much as revenues at these times of high commodity prices. The government chooses to focus on wages and the 'manipulated' core CPI as a basis for determining inflation, but they are conspicuously flawed when you consider that they fail to consider the costs of 'actual' living. eg. They exclude rent or property values, they exclude food, energy, because these items are considered too volatile...of course that is true over the short term.

You might be aware that 'gold bugs' have been advocating gold for a great deal of time. Well its not that they have been wrong, as since 2001 gold has risen from $290 t0 $730/oz before consolidating around $630-680/oz. So they have been wrong of late. The reason for this lies in the role played by gold. Gold fills two functions:

1. Industrial demand: There is a supply and demand for gold in industrial and consumer applications like dentistry, electronics

2. Investment demand: There is a demand by consumers and investment funds which is fairly long term, and recognises both the industrial and speculative demand for gold.

3. Speculative demand: There is a transient demand for gold that that recognises its role as money. When the monetary system comes into question, people want to hold gold because its tangible, unlike the paper offered by governments.

When economies are growing strongly there is a portfolio-weighted investment demand for gold that tends to support the gold market. Gold has also been supported by tight supplies as most central banks have agreed not to sell more than 500 tonnes per annum over 5 year periods. When you have strong economic growth other investment options will out-perform gold. It is not until gold is recognised as a safe-haven that we see gold markets really getting their rightful attention. For that to happen, we are going to see:

1. Tightening of interest rates to the extent that other asset classes (property, equities, bonds) offer a poor investment alternative.

2. Higher inflation: Dont expect inflation to readily show up in wage demands, its more likely to show up in higher commodity prices.

3. Technical signal: Gold prices break their previous resistance and move up to higher levels. This is a conservative strategy to wait for price evidence. We need to look at gold in a number of currencies to look at the real change ib gold prices.

I will update this file with more content in coming weeks!