Although I have overheard several market observers suggesting there was "nowhere to hide" from the latest bout of acute market turmoil, that was certainly not the case. As indiscriminate selling gripped every sector of the equities space, and traditional safe havens grew increasingly unattractive, gold offered an anchor for financial markets amid the tumultuous storm.
Spot prices for gold touched another new all-time high in London trading overnight, nearing the $1,780 mark on the heels of remarkably strong momentum generated Monday after S&P's downgrade of U.S. debt. Already in August, the time-tested currency has surged nearly $160 to the overnight high, for a 10% appreciation against the U.S. dollar.
Incredibly, since July 1, the U.S. dollar has shed a full 20% of its value relative to gold. So far in 2011, the SPDR Gold Trust (NYSE: GLD ) has gained 22% against a 5% drop for the Dow Jones Industrial Average. During Tuesday's session, gold pulled back sharply into the $1,730 range, reflecting the sort of increasing volatility I anticipate as the metal's bull market trend continues to mature.
Issuing an upgrade for gold
Effectively, S&P's downgrade of U.S. debt can be interpreted as a downgrade of the dollar; so naturally, the action served as a de facto upgrade for gold within the eyes of capital markets. Meanwhile, gathering concern over the scale of debt distress impacting Spain and Italy rendered the euro a similarly distasteful option as a destination for risk-fleeing capital. Some observers of the European crisis are calling for a massive increase in the scale of the European Financial Stability Facility, to upward of $3.5 trillion, while others have dubbed Italy "too big to save."
U.S. Treasuries remain in high demand at historically low yields, underscoring the painfully low standards investors have set for their chosen safe haven instruments. For those who understand that the trajectory for further impairment of the world's major reserve currencies remains etched in stone, gold shone brightest amid a pile of foundering alternatives as the world's ultimate safe haven.
This is precisely the resurgent role of gold that former Federal Reserve Chairman Alan Greenspan referred to when he observed in 2009 that "gold still holds reign over the financial system as the ultimate source of payment." I encourage Fools at this juncture to consider the proven perspective from gold expert Jim Sinclair, who recently opined that "gold between $1,600 and $1,764 is deciding its new and elevated role in international finance."
Back in April, when gold hovered beneath $1,500 per ounce, I discussed my own view that gold and silver would prove their immutable value as ultimate safe haven assets. Because I consider the content particularly relevant for Fools attempting to reshape their attitudes toward precious metals to account for recent developments, I offer the following passage for your due consideration:
While I do maintain a variable cash position to mitigate downside risk, I have personally selected gold and silver as my safe havens of choice. However, all one has to do is review the horrific sell-off in these metals in 2008 and 2009 to see that even these stalwarts of recent outperformance proved susceptible to the vagaries of indiscriminate selling. Given the sharply reduced attractiveness of U.S. Treasuries since that time, however, I consider a repeat performance of that degree of weakness extremely unlikely. Rather, the next time push comes to shove and investors run for the exits -- and unfortunately I do think it's just a matter of time -- I expect that gold and silver's true potential as ultimate safe haven assets in a world of tattered paper will gain overdue recognition among individual and institutional investors.
In the intervening period between the onset of the global financial crisis and the present day, we have been witness to a remarkable (yet gradual) sea change in prevailing attitudes toward gold and silver. Instead of fleeing gold en masse, as they did so notably in 2008, investors are visibly turning to gold because no other asset shines as bright in macroeconomic circumstances like those that we now face on a planetary scale.
Silver for the moment remains mired in relative weakness as gold marches higher, but it's worth noting that the iShares Silver Trust (NYSE: SLV ) has nonetheless advanced nearly 22% year to date. Unless gold carves a deep corrective retreat very soon, Fools can expect the stretched slingshot that connects gold and silver to restore the latter's upward momentum in fairly short order. However, if the outlook for industrial silver demand were to weaken substantially, that could set up the ultimate buying opportunity for silver, because the slingshot could be stretched further still.
A pair of commodity analysts at J.P. Morgan may finally be acknowledging the enormity of this ongoing sea change themselves. Before this week, the analysts had expected gold to reach $1,800 per ounce before the end of 2011, but they have now adjusted that target to forecast gold reaching $2,500 per ounce before the end of this year! I have been tracking gold-price forecasts from the major financial institutions for several years running, and I have never witnessed an adjustment of this magnitude.
Although I have always maintained that my long-standing $2,000 price target for gold would ultimately prove laughably conservative, even this staunchly bullish Fool has a hard time envisioning $2,500 gold arriving quite that quickly. A rise that pronounced would not only imply a set of worst-case scenarios for global financial markets, but could also spawn the kind of bubbly market conditions from which gold has thus far been spared. Even as a long-term gold investor, I certainly hope those analysts are as wrong today as their colleagues have routinely been in the past.
Your margin of safety for purchasing gold
To be sure, anyone going out to purchase gold today must be cognizant of the potential for near-term price volatility in both directions. Any number of near-term scenarios could see gold snapping back abruptly, and the longer we go without a corrective retracement, the more violent such a retracement might eventually be. Nonetheless, I always encourage Fools with zero gold exposure to at least dip a toe into the water, and then look to build upon that position into relative weakness. At $2,500 gold, the difference between an entry price of $1,730 and $1,600 might seem fairly trivial.
But discerning Fools already have means at their disposal to acquire gold and silver exposure at a stiff discount to current spot prices. I refer, of course, to the range of quality precious-metal mining and exploration companies that have seen their share prices drop precipitously thus far in this equity sell-off event. Because the precious-metal equities have remained remarkably disjointed from the upward momentum of metal prices for quite some time now, I believe these equities offer entry points to investors that are akin to buying gold or silver bullion at a 25% to 50% discount to prevailing spot prices.
At $1,700 per ounce, Yamana Gold's (NYSE: AUY ) market capitalization of $10.2 billion pales in relation to the $30.4 billion market value of the miner's gold reserves (including this gold royalty stream from Agua Rica). Although Yamana's shares have fared relatively well during the equity exodus, the stock remains a far cry from fair value. IAMGOLD (NYSE: IAG ) carries a market capitalization of just $7.2 billion, while its hoard of 15.2 million gold ounces would sell today for $25.8 billion. After adjusting for the miner's alluring niobium assets and plentiful cash on hand, the valuation equation grows far stronger still.
I liked Eldorado Gold (NYSE: EGO ) two years ago, when the stock sported a $5.9 billion market capitalization for 12.7 million ounces of gold in reserves. Given an 80% increase in the price of gold, a 47% expansion of gold reserves to 18.7 million ounces, and the formulation of the industry's leading production growth initiative; the 68% increase in Eldorado's market capitalization since August 2009 appears wildly inadequate.
As enticing as I consider many of the quality gold producers here, the silver miners continue to dominate my own investment interest. Hecla Mining (NYSE: HL ) has fallen entirely too far from grace since the company revealed a costly litigation settlement, and now the stock resides deep in the Foolish bargain basement. Silvercorp Metals (NYSE: SVM ) has shed nearly 50% from a 2011 peak recorded in April, and likewise rings this Fool's bargain detector.
With gold and silver producers like those listed above available at valuations that might begin to look appropriate at significantly lower prices for the respective metals, I continue to wait patiently for the equity component of the precious metals complex to transit through its own powerful sea change. For those who may be nervous about delving into the space at these seemingly lofty heights, I recommend the quality miners for the built-in margin of safety they provide against potential near-term price volatility.