Gold prices have been used as a store of wealth for centuries. Naturally, prior to the modern period, the monetary system was quite basic and rudimentary. Gold prices can be quite erratic and have a history of massive swings. One issue with gold prices is that supply can and does come back into the market. Unlike other commodities that are used up, such as oil, when gold prices move up, people can sell their holdings, which can be melted down and added to the world supply again. High gold prices are usually a sign of a lack of faith in paper money, usually due to inflation, which erodes the value of fiat money.
The recent pullback in gold bullion has certainly hurt gold mining stocks. While one can develop a sound investment strategy, if the price of the stock continues moving downward, it makes it extremely difficult to step in and buy.
Gold mining stocks have seen a serious sell-off over the last few months. So what about gold mining stocks as a long-term investment strategy?
To begin with, looking at the commodity from an investment strategy point of view, gold has pulled back and has bounced off a key support level. Obviously, whatever direction the price of gold moves, the majority of gold mining stocks will move in tandem.
No one can predict the price of a commodity for certain. However, we do know that there remains strong demand for physical gold and that central banks around the world continue to have easy monetary policies.
While that is a sound investment strategy, it does not guarantee that gold will see an increase. The market could continue declining, as more sellers of paper gold emerge.
Assuming that gold prices will increase, gold mining stocks are beginning to look attractive, because they’ve declined to such a level that many are trading at a discount to book value. This means that if the company were to be bought and sold in pieces, the sum of the parts is worth more than the current stock price.
This type of investment strategy, looking for value, is one approach that an investor can take when trying to determine which gold mining stocks might be suitable for their portfolio. Momentum is not bullish for gold mining stocks at the … Read More
Since hitting a low of $253.70 in July 1999, gold prices have surged over 650%, topping $1,921 per ounce in September 2011. Currently trading at more than $1,660 per ounce, gold has logged 13 consecutive years of positive returns. While some economists think gold’s historic run will come to an end, others are not so sure.
The overarching driver of the price of gold will continue to be the global financial crisis, ongoing tensions in the Middle East, weaker currencies, and the potential for faster inflation. As a result, some analysts believe gold will rise above $2,200 an ounce in 2013.
At the other end of the spectrum are those bears who think gold is in for a big correction. Greater-than-expected U.S. growth, a stronger U.S. dollar (in spite of the Fed’s printing presses running overtime), and the end of the crisis era could pull gold down to as low as $1,200 an ounce.
Try telling that to Russia, Brazil, Korea, China, Kazakhstan, Turkey…
To stave off the negative impact of the global crisis, the National Bank of Ukraine raised the percentage of gold in its reserves in 2012 to 7.7% from 4.4% a year ago, reaching 1.1 million troy ounces. (Source: Chanjaroen, C., “Russia, Kazakhstan Expand Gold Reserves as Central Banks Buy,” Bloomberg, January 28, 2013, last accessed February 6, 2013.)
Brazil doubled its gold holdings in two months, buying 17.2 metric tons in October and 14.7 metric tons in November. And in August and September, Iraq increased its gold reserves to 31.1 metric tons from 5.8 metric tons.
The Bank of Korea increased its gold reserves by 20% … Read More
The historic and unprecedented action by the Federal Reserve in enacting extremely loose monetary policy is an attempt to stimulate the economy. I’ve always felt that a central bank should have one mandate: the stability of the currency. The Federal Reserve has a dual mandate; in addition to keeping inflation in check, the American central bank also is attempting to lower the unemployment rate through monetary policy, a task not easily achieved.
Over the last couple of years, we have clearly seen that, while the economy has started to improve, it is far below potential gross domestic product (GDP) growth levels. Even with the historic monetary policy initiatives, the Federal Reserve is limited in what it can and cannot do. While the Federal Reserve may have good intentions, there are serious consequences due to unintended outcomes.
Through monetary policy action the Federal Reserve is attempting to increase the wealth effect by increasing asset prices. The thinking is that the wealthier people become through the increase in their assets, the more likely it is that they’ll be willing to spend. This action is one reason why we’re seeing gold prices go up, as well as the stock market and home prices since 2009.
Recently published data show that at least this part of the plan by the Federal Reserve is working, as the net financial wealth for Americans increased by $1.7 trillion to $64.8 trillion for the third quarter 2012. According to the Federal Reserve, this is the highest level of net worth by U.S. households since 2007. (Source: “U.S. household wealth rises to near 2007 high,” Reuters, December 6, 2012.)… Read More
When it comes to commodities such as gold bullion, there are several criteria that ultimately determine the price level. Many times, I have discussed the impact that easy monetary supply, commonly known as money printing or quantitative easing, has on the economy. Quantitative easing is a well-known phenomenon these days, and the current environment is interesting in that numerous central bankers around the world are engaging in the same monetary policy, trying to print money to solve short-term problems, irrespective of the long-term side effects.
In my article “Gold Bullion Forecast for 2013,” I stated that, when considering the level of monetary policy stimulus worldwide, it is highly likely that gold bullion will exceed $1,800 shortly, with a strong possibility for gold prices reaching $2,000 an ounce in 2013.
However, new information makes this prediction even more probable. The demand side of the equation for gold prices is extremely important. India has long been a huge consumer of gold bullion. Recently, however, because of the weak rupee, India’s currency, gold prices in that nation have been at all-time highs. This has led to lower levels of gold bullion buying and, earlier in the year, a strike by gold bullion dealers to protest an import tax imposed by the government on gold bullion.
In spite of lower than normal gold bullion demand by Indian buyers, gold prices have remained extremely strong. A new report by the World Gold Council’s India office stated that they believe Indian demand for gold bullion in 2012 will end up reaching approximately 800 metric tons, a substantial increase from earlier estimates of 650–750 tons. (Source: “India … Read More
With the rise of instability within the European Union (E.U.), gold bullion has become increasingly attractive as a backstop. Next to America, Germany has the second-largest holding of gold bullion, with approximately 3,600 metric tons. What is interesting at the current moment is that many voices within Germany are calling for the Bundesbank, its central bank, to check its international holdings, namely in the U.S., as not all of the gold bullion held by Germany is being stored on the country’s own soil.
A recent report by the German Federal Audit Office criticized the Bundesbank for its lack of a better international inventory system. While the German central bank has a strong handle on its domestic gold bullion inventory, its knowledge of its holdings in other countries, especially the U.S., is not as thorough as some would like. (Source: “Why Germany Wants to See its US Gold,” Der Spiegel, October 30, 2012.)
With gold prices at very high levels, there is a greater concern to ensure the accuracy of the level of gold bullion actually being held. With approximately half of Germany’s gold bullion being stored in America, the lack of proper auditing by German officials worries some within Germany.
Of Germany’s 3,600 metric tons of gold bullion in total, 1,536 are being held at the Federal Reserve Bank of New York. (Source: Der Spiegel.) Some within the German community have been calling for a return of the gold bullion to help fund other proposed ventures, including a natural disaster relief fund or an education fund. With gold prices so high, many people believe this would be a more practical … Read More