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.
