Gold: Too Legit to Quit

From the backwaters of marginalization and ridicule to the front pages of reluctant acceptance, gold has endured a very gradual ride to full-fledged legitimacy.

If there is any remaining doubt that gold has reasserted its traditional and rightful place as an asset class of persistent value -- fit for any well-formulated allocation strategy -- let's take a moment to survey the legitimization of gold as seen through the lens of respected sources in the financial realm.

  • At the top of Fortune Magazine's list of the 100 Fastest-Growing Companies for 2010 sits none other than Eldorado Gold (NYSE: EGO  ) .

  • Bloomberg's Businessweek revealed this week that the median 2011 price target among 29 analysts surveyed by Bloomberg calls for $1,500 gold. Randgold Resources (Nasdaq: GOLD  ) CEO Mark Bristow, whose company boasts one of the sweetest-looking long-term stock charts in the business, also considers $1,500 a reasonable price target for gold in 2011.

  • In a real sign of the shifting tide, The Wall Street Journal recently echoed my long-held contention that gold is not adequately understood when it is viewed as a commodity. The article detailed that gold price movements are significantly more correlated with the U.S. dollar than inflation.

  • George Soros spooked the gold market last January when he called gold "the ultimate asset bubble," but Soros Fund Management still holds 5.24 million units of the SPDR Gold Trust (NYSE: GLD  ) ... with a present market value above $625 million.

  • The Gold Anti-Trust Action Committee (GATA) -- the organization that alleges gold prices are suppressed through a coordinated effort to forestall the deterioration of fiat-currency purchasing power -- was afforded serious and respectful consideration in a recent piece by The Financial Times.

  • China moved briskly this week to prove that this recent policy directive regarding gold was more than words on paper. The state-owned China National Gold Group (CNGG) is using Vancouver-based China Gold International Resources (in which CNGG is already a 39% stakeholder) as a conduit for consolidating assets outside of China, beginning with a $742 million transaction involving a copper mine in Tibet that features gold and silver by-product. CNGG is the same entity that inked a gold supply agreement with Coeur d'Alene Mines (NYSE: CDE  ) in June, and is the leading gold producer in China.

  • Barrick Gold (NYSE: ABX  ) founder and Chairman Peter Munk, who knows from experience the sharp sting of an imploding hedge book, recently predicted further price gains in gold and reiterated the company's no-hedge strategy. Fellow major producers Newmont Mining (NYSE: NEM  ) and Goldcorp (NYSE: GG  ) display similar confidence in the ongoing price trajectory by avoiding gold hedges altogether.

Of course, the most reputable source of all to convey gold's undeniable return as a legitimate asset class is the market itself. Despite unprecedented nominal prices, global gold demand surged by 36% in the second quarter (including a noteworthy 121% increase in Chinese retail investment demand). According to the World Gold Council, global investment demand through bullion ETFs and similar products increased an eye-popping 414% in the second quarter.

Although gold's renewed legitimacy can scarcely be denied, some will attempt to spin that achievement into signals of a frightful bubble. Since gold was so vehemently shunned and marginalized for decades before this bull market emerged, and because it has only recently garnered serious consideration and respect a full decade into this bull market, I view ample room for an expanded ownership base amid a flourishing price environment.

As Munich-based UniCredit analyst Jochen Hitzfeld said: "Investors' interest is still growing and still hasn't reached a reasonable part of their portfolio. Gold is still an under-owned asset, that's perfectly clear."

People take time to wake up to a new idea; even if that new idea is as ancient as gold's reign as a medium for exchange. I will close with a pair of quotes from former Fed Chairman Alan Greenspan. The first quote is from 1967, and the second is from 32 years later, in 2009:

  • "Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights."

  • "What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment."

Gold's legitimacy was never lost; it was merely forgotten, ignored, and then grossly misunderstood.

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 57 potential investments, and you'll find Christopher's comments on most of them.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly in the CAPS community under the user name TMFSinchiruna. He tweets. He owns shares of Coeur d'Alene Mines and Eldorado Gold. The Motley Fool has a disclosure policy.


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  • Report this Comment On September 01, 2010, at 3:16 AM, MrCheez wrote:

    Excellent article, Gold's value will always rise with the growth of world economies, especially since it will shortly play a huge roll in energy production. Just as Platinum was used for gas emissions, on the new wave of electric vehicles, gold connections will be vital. Industial demand was around 13% of demand, this will triple in size only to be second to investment demand. Jewelry is investment now, and of the 20,000 tons of gold above ground, it is not liquid. Melt my coins for my car's power, no way. But it will happen.

  • Report this Comment On September 01, 2010, at 6:12 AM, decbutt wrote:

    Markets are funny things; subject to the vagaries of human emotions. When they continue to rise, everyone says that, in hindsight, the rise was obvious. When they fall, everyone says that, in hindsight, a fall should have been expected under the circumstances.

    The key point that gold bugs always ignore is that gold's draw as an "investment" is based completely on the expectation that someone else would be willing to buy the gold off you for the same amount - or more - than you paid for it yourself.

    That is all well and good in a rising market.

    And those are the conditions we have had (excepting a few notable pull-backs) for more than half a decade.

    The mistake that the investors make is to believe that this is attributable to the gold itself - much like people made the mistake of believing that leaving your job for house-flipping was a smart career move in 2006, on the basis that house prices rise.

    The ONLY return offered by gold is at the time of sale. It literally *earns* nothing in the mean time. No "yes, but fiat currencies -" ... it earns nothing.

    Shares in well run companies, however, continue to earn money for as long as they are held.

    And while the market may sometimes disagree with your valuation of shares in your portfolio - sometimes undervaluing them considerably - this is an advantage for the buy-and-hold investor (esp. with dividends re-invested).

    For a gold holder - you have no reason to sell while the market is stable or rising. But if the market is falling you have some good motivation to offload ASAP ....

    Right at the exact same time as everyone else.

    The bottom line is this: we are not in a gold bubble right now. But that does not mean that we cannot have a bubble-sized crash anyway.

    All the "fundamentals" and "macro economic" happenstance in the world will not protect your money from the cruel sea that is the market if the market turns against gold.

    And holding out through the storm may make perfect sense with shares - since the companies behind the shares continue to earn a return, regardless of the share price - but is there any good reason to hold gold when the price collapses?

    I am not forecasting a cash in the price of gold.

    I am forecasting that the gold market will be subject to the confidence that people have in gold's ability to produce a return.

    That is the eternal key.

  • Report this Comment On September 01, 2010, at 10:21 AM, XMFSinchiruna wrote:

    MrCheez,

    You may wish to reconsider your degree of bullishness on industrial demand for gold. That segment of demand is a nice kicker, but investment demand is completely in the driver's seat with respect to the present bull market cycle.

    decbutt,

    Thanks for sharing your thoughts. For the record, many of us who have been paying attention to gold for many years now called this rise before it took place, and not in hindsight.

    Regarding your comment on gold investments requiring a buyer at same or higher price to lock in for no loss or a gain, I would simply point out that the same can be said for any type of investment. I would also hasten to point out that bullion is not the only vehicle for investing in gold, and that many successful producers are paying small dividends and signaling their intention to raise them going forward.

    Many critics of gold seek to compare gold to stocks as if they were somehow mutually exclusive within a portfolio. By no means is anyone suggesting that investors shun all equities and hold nothing but gold ... this is about allocating a segment of one's portfolio commensurate with their conclusions about gold's outlook. There is room in every portfolio for both types of assets. In any event, the more proper comparison would be gold vs. bonds, since gold provides the safety that many believe they are securing when they turn to bonds.

    Also, now that gold has finally returned to full-fledged legitimacy, it is beyond time to bury the derogatory term: "gold bugs".

    You make the assertion that gold holders have no incentive to sell into strength. Gold investments are held by all kinds of investors, from fast-money quant funds to long-term buy-and-holders. To attempt to characterize gold investors with a single stroke has no basis on fact. Hedge funds continually sell into strength in gold, which is one of the reasons the sector experiences such gut-wrenching volatility.

    As for holding gold through a crash, I held onto 100% of my gold positions through the infamous correction that began in March 2008, and I'm very glad I did. As you pointed out, market dislocations like that are fortuitous events for long-term buy-and-hold investors, and I appreciated the opportunity to add to some positions into severe weakness.

    Markets can diverge from fundamental drivers for a time, but ultimately the fundamentals always hold sway. That is the eternal key.

  • Report this Comment On September 01, 2010, at 11:58 AM, silverminer wrote:

    P.S. Miner Buenaventura (BVN) yields more than a 5-year Treasury bond. :)

    http://www.fool.com/investing/general/2010/05/03/gold-can-pa...

    TMFSinchiruna (aka silverminer)

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