The price of gold and the number of reasons to own it are moving in opposite directions.
Gold continues to seek support after dipping beneath $1,550 per ounce recently, while current global developments and increasingly visible macroeconomic scenarios underlying the bullish long-term outlook for the monetary metal have only increased in number and scale. Given the most attractive entry prices that investors have seen in some time, let's have an updated look at the bullish fundamental landscape for gold and the array of seasoned professionals who have recently accumulated gold exposure.
Stacking up the reasons to buy into the bricks
What I find most disturbing about JPMorgan Chase's massive sour bets in derivative instruments -- and the very existence of the offending unit's reported $100 billion portfolio of "asset-backed securities and structured products" -- is the stark reminder of how little has changed in the behavior of our too-big-to-fail financials since the initial stages of the global financial crisis. Hedge fund manager James Rickards reminds us that many of the same folks who opened Pandora's box with the disastrous proliferation of securitized debt markets continue to play Russian roulette with our collective financial future.
In Rickard's words: "Wall Street CEOs ask to be treated like nuclear engineers and say "trust us" when it comes to the complexity of their tasks. In fact, no trust could be more misplaced and no claim to superior knowledge could be further from the truth." Dodd-Frank, frankly, is no Glass-Steagall. Systemic risk has not been purged, but has merely absconded from public consciousness. As the timeless antithesis to leveraged casino gambling and counterparty risk, gold will continue to increase in value against the paper currencies ravaged by the inevitable bouts of deleveraging to come.
Speaking of the inevitable, Greece is looking increasingly likely to exit the eurozone. Less than three months after the European Central Bank shelled out $713 billion in low-cost loans to 800 financial institutions, the clear consensus is that far more intervention will be required to arrest the seemingly unstoppable contagion of debt distress. The chorus of political voices in Europe calling for a change from Angela Merkel's reluctance to embrace limitless intervention and stimulative spending has reached a deafening crescendo, and in my view the outlook for a return to fiscal or monetary sanity on the continent has never been further from reach.
Because the entire global monetary regime has effectively descended into a perpetual contest of competitive devaluation, Fools can bet that Europe's looming crisis interventions will not occur in a vacuum. Accordingly, the International Monetary Fund has asked the Bank of England to cut interest rates further and resume debt monetization, adding that fiscal stimulation remains an important contingency in the event that those monetary efforts fail to spur adequate growth. While downgrading Japan's sovereign credit rating to A+, Fitch Ratings observed that the nation's "fiscal consolidation plan looks leisurely relative even to other fiscally-challenged high-income countries."
That's quite a mouthful from Fitch, since political expediency here in the U.S. is bound to ensure that the looming "fiscal cliff" never materializes to any meaningful degree. As I wrote on my CAPS blog a few weeks ago, the watershed election of French president Francois Hollande places politicians on notice that "threatening to inject austerity into a subsidized, stimulated, and data-massaged illusion of relative economic stability is tantamount to swift political suicide." On the monetary side, both PIMCO bond guru Bill Gross and Goldman Sachs continue to share my view regarding the inevitability of a third round of quantitative easing from the Federal Reserve.
Each of the preceding macroeconomic developments and looming scenarios bolsters the long-term bullish case for gold. Collectively, in my opinion, the full nature of our global financial predicament (and the alarmingly predictable policy responses to them) guarantees a gold price well north of my conservative $2,000 price target.
Look who's buying gold now
Moreover, I perceive little downside risk from these levels -- and I am not alone in that assessment, either. During the 2008 correction in gold, a well-informed estimate of the gold-mining industry's all-in cost of production provided a timely indication of a likely floor beneath the metal's prevailing price. At the time, Gold Fields (NYSE: GFI ) CEO Nick Holland pegged the industry's comprehensive cost at $700 per ounce, and indeed that mark held as a cement floor beneath gold. Presently, Holland estimates the industry's all-in cost at $1,400 per ounce, and he recently revealed that Gold Fields is "using US$1500 as a long term price because we try to structure the business around a floor price, and we think that is a good floor price." Economist Marc Faber has likewise pegged $1,500 as "significant support." Legendary commodity investor Jim Rogers has said he will buy more gold at $1,600 per ounce and step up his buying if it dips to $1,500. Ultimately, I maintain, $1,500 gold is just the beginning.
A menagerie of noteworthy buyers of gold in the first quarter of 2012 serves as a reminder that seasoned professionals are not pressing their luck by trying to time a precise bottom to execute their gold purchases. Billionaire George Soros tripled his stake in the SPDR Gold Trust (NYSE: GLD ) during the quarter, while hedge fund Eton Park Capital initiated a holding with 739,117 shares of the bullion proxy worth about $113 million at the time of this writing. Other noteworthy accumulators of gold included Gross' PIMCO, the Teacher Retirement System of Texas, and a Japanese pension fund.
John Paulson kept his huge gold bullion position unchanged and added to his stakes in gold miners Barrick Gold (NYSE: ABX ) and promising mid-tier selection IAMGOLD (NYSE: IAG ) . Highlighting the compelling opportunity in mining shares after the shocking weakness that has gripped the sector, Gabelli & Company fund manager Caesar Bryan pointed out during a recent interview with King World News that a $1,000 investment in Goldcorp (NYSE: GG ) offers exposure to more than six times as much gold as a corresponding stake in a bullion vehicle. An equal stake in leading mid-tier miner Eldorado Gold offers exposure to eight times as much gold!
I have issued outperform calls for each of the miners named above in my Motley Fool CAPS portfolio, and just as I have through prior corrective pauses, I will patiently await the next inevitable rally in the sector to spur a return to more reasonable equity valuations for the miners of gold and silver.