Why Gold Will Continue to Climb

While gold carves an abrupt retreat, after blasting through to a new all-time high above $1,260 per ounce early Monday, a familiar chorus of top-callers and bubble-proclaimers will again emerge to rattle the confidence of uncertain investors.

With so much bubble talk out there surrounding gold, it becomes necessary -- in the best interest of long-term gold investors -- to point out the astonishing regularity with which every momentum shift in gold's nine-year secular bull market trend has drawn fresh reiterations of bubble declarations. Their track record, frankly, is unimpressive. In my estimation, we remain so substantially removed from any ultimate top in the gold price as to render bubble declarations repeatedly, predictably, and grossly premature.

Unlike Nouriel Roubini's bold claim that those expecting sustained strength in gold prices "delude themselves," we here at the Fool consider an open dialogue weighing diverse perspectives as the best means to build a stronger investment community. This recent roundtable provides a timely and illustrative example.

For my part, I continue track the fundamental drivers that I believe portend a continuation of this long-term trend beyond my personal target of $2,000 per ounce. Although I try to avoid attributing near-term price swings to specific macroeconomic developments, the following events deserve careful consideration by Fools interested in understanding gold:

  • China announced over the weekend that it will permit a gradual revaluation of the yuan by chipping away at the peg that has held the currency in lockstep with the U.S. dollar. Although hailed by U.S. officials as strongly supportive of U.S. exports, I believe this move may have unforeseen consequences. A yuan revaluation could slow the pace of China's accumulation of foreign reserves, and thereby reduce the behemoth's appetite for U.S. Treasury bonds. At a moment when U.S. deficit spending is reaching unprecedented heights and forecast to increase for years to come, this Fool finds it difficult to identify alternative creditors. In short, this raises the specter of resumed quantitative easing.
  • Central banks continue to reshape the very structure of the gold market by actively amassing gold reserves. Like China before it, Saudi Arabia became the latest nation last week to reveal effectively clandestine purchases of gold by "restating" its hoard by 125% from 143 tonnes to 323 tonnes. This increase is nearly as large as India's 200-tonne purchase of gold last October that helped spark another major breakout in gold prices. Alongside purchases by Russia, the Philippines, and others, sovereign purchases have emerged as a powerful force in the surprisingly small-scale global market for physical gold.
  • Over in Europe, the landscape of debt distress and fiscal pitfalls continues to worsen. Fitch Ratings recently suggested that hundreds of billions of Euros in bond purchases by the European Central Bank (ECB) will be required to contain the crisis, and deep divisions on policy directions are likely to emerge as quantitative easing returns to the table. In Spain alone, some 600 billion Euros in foreign debt will roll over this year. In Greece, even with severe austerity measures, the debt is projected to reach 150% of GDP. None of this is pretty, but all of it raises expectations for further strength in gold prices.
  • Unfortunately for the United States economy, hope of a robust recovery is fading. Since we have seen the reflationary resolve with which prior deflationary concerns were met, I have no doubt that subsequent battles will be fought with ever-increasing mounds of debt. This predicament, in my opinion, sits beside the massively stressed global derivatives market as the twin 800-pound gorillas in the room. Short of summoning Godzilla, I cannot fathom how we can manage to slay these muscular foes.

In a nutshell, these developments constitute some of the key fundamental drivers affecting the gold (and silver) markets at present. These are now added to the end of a long list of prior developments that I strongly believe have laid a stone foundation for higher gold prices.

Regardless of whether last week's push above $1,250 holds in the near term, I maintain that the trend is still a discerning Fool's friend. Having fully discussed the challenges involved in gaining exposure to physical gold bullion, I continue to advocate consideration of mining shares as a profitable means to invest in the bull market. Although I am most enthusiastic about my top silver pick, Silver Wheaton (NYSE: SLW  ) , and also the new Global X Silver Miners ETF (NYSE: SIL  ) , attractive options abound in the gold space as well. Goldcorp (NYSE: GG  ) possesses superior growth potential for a large-scale miner, while Yamana Gold (NYSE: AUY  ) continues to reside deep in value territory for a mid-level, low-cost producer.

As this bull market matures, however, this Fool is focusing increasingly upon more junior members of the mining universe to tap greater room for growth. Taseko Mines (AMEX: TGB  ) has consistently earned this Fool's praise, and New Gold (AMEX: NGD  ) is busy growing into a large pair of golden slippers. For additional ideas, I encourage Fools to visit my silverminer CAPS portfolio, and also to review the holdings of the Market Vectors Junior Gold Miners ETF (NYSE: GDXJ  ) .

Gold is a hot topic on the blogs at Motley Fool CAPS. Join the free service today and see just how many Fools are taking the long view when it comes to investing in gold. The "Gold" tag at CAPS lists 52 potential investments, and you'll find Christopher's comments on most of them.

Fool contributor Christopher Barker carries a silver coin that reads: "Honest value never fails." He can be found blogging actively and acting Foolishly in the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Market Vectors Junior Gold Miners ETF, New Gold, Silver Wheaton, Taseko Mines, and Yamana Gold. The Motley Fool's disclosure policy is 0.999 pure.


Read/Post Comments (8) | Recommend This Article (30)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 23, 2010, at 8:31 PM, plange01 wrote:

    1250-1260 is it for gold every time it gets close to this level i put in a short with the etf GLL and take home the money 5 times in 2 months and moving towrd my number again!gold is a great way to make easy money but only shorting it...

  • Report this Comment On June 24, 2010, at 12:24 AM, XMFSinchiruna wrote:

    plange,

    You might as well go to Alaska and fish for King Crab ... you'll make a lot more money with a lot less risk than you're ever likely to make shorting gold.

    Scores of wayward speculators have been badly burned over the past several years trying to bet against gold.

    For the record, $1,250 has only been reached once (June 18-21). Also for the record, I have made dozens of successful trades on recent volatilty by playing the long side, without having to bet against the best-performing asset of the last decade.

    If memory serves, you called gold the "best short of the year" last September when gold was hovering just over $1,000

    http://www.fool.com/investing/general/2009/09/23/google-500-...

    ... on the very same day I called gold the biggest market opportunity.

    http://www.fool.com/investing/general/2009/09/23/biggest-mar...

    Time will tell which of us had it right.

    Just be sure you've carefully thought through your reasons for believing gold can not blast through this latest high and build a new long-term floor above $1,300 as I expect it soon will.

  • Report this Comment On June 24, 2010, at 8:06 AM, KurtEng wrote:

    The problem with gold is that it's so hard to value. I remember when a barrel of oil was trading at around $140, many econonmists/investors were complaining that speculators were artificially driving up prices. For gold, speculation is the norm. A large portion of the demand for gold comes from jewelers and speculators, both of which are subject to whims and fads. Right now, gold bugs are deservedly feeling good about themselves, but I think too much confidence often leads to a bubble. Maybe I'm too much of a contrarian, though.

  • Report this Comment On June 24, 2010, at 8:52 AM, XMFSinchiruna wrote:

    KurtEng,

    Gold is no harder to value than any other currrency ... they fund their value relative to each other. Because gold prices are manipulated (see "Is Your Safe Haven a House of Cards") and suppressed (See Douglas' "Pirates of the COMEX") by the major bullion banks, however, what we have seen to date has not yet approximated a free market valuation for gold. We remain well beneath the inflation-adjusted high from 1980 ... and the present crisis is orders of magnitude more severe in scope and structure.

    You'll have to identify for me this group of speculators. They do exist, but far too often the presumption is made that they dominate this market. There is an entire leveraged paper market (OTC derivatives) in London that can rightfully be called a den of speculation, but in the physical market for actual gold that is not what this studious Fool has observed.

    Those making room in their portfolios for gold are not, in my estimation, speculators ... they are rational investors looking to diversify into a proven hard currency that not so long ago was considered a staple of sensible asset allocation. Because gold is such a small physical market, a broad move to make room for even just 5% gold exposure by a wide swath of investors will have a remarkable effect upon prices ... and that's a shift that has only just begun.

    Furthermore, central banks are emerging as the driving force in gold accumulation, and these reserve holdings are hardly speculative in nature.

    I understand the temptation, for those who view gold as nothing more than a commodity like oil, to presume that gold is floating upon a cloud of speculative froth. I encourage you to adjust your thinking and view gold properly as a currency, and then to see that as unbacked paper currencies become increasingly impaired by debt, gold's multi-year climb can be seen as a natural and direct consequence rather than some hyped-up frenzy.

    I wish the best for all Fools, and hope that some will yet see fit to seek the protection that gold offers during periods of monetary crisis.

  • Report this Comment On June 24, 2010, at 9:36 AM, XMFSinchiruna wrote:

    fund = find :)

  • Report this Comment On June 24, 2010, at 9:44 AM, KurtEng wrote:

    TMF,

    I consider someone who trades in a commodity anticipating future price movements to be a speculator. Isn't that every investor in gold?

    In my opinion, currency is very hard to value - or hard to predict the value. I would never invest in a foreign currency, mostly because I don't consider myself qualified to do so. You mention that a move by 5% inverstors to make room for gold investment would cause a large increase in price. I agree. Imagine if investors eventually became more confident in stocks and moved funds out of gold into stocks. I think that would cause a large decrease in gold prices. The other variable is increased gold supplly due to increased mining activities and people scrapping gold that they already own.

  • Report this Comment On June 24, 2010, at 11:26 AM, TMFAleph1 wrote:

    It's difficult to take someone seriously when they write that:

    "gold is a great way to make easy money but only shorting it..."

    That sort of hubris is usually followed by a painful comeuppance.

  • Report this Comment On June 24, 2010, at 4:59 PM, hbofbyu wrote:

    History repeats itself but always does so with just enough variation that I can never seem to make any money off it.

    Good article though.

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