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"everybody should buy gold" editorial

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    Support for Gold is Broadening

    By Laurence Roulston (bio)
    June 20 2002

    Please visit our website www.resourceopportunities.com


    The popular press has forgotten how recently it was that they were sneering at gold. Suddenly, they are falling all over themselves to extol the virtues of having some gold in one's portfolio.

    Normally, when the popular press picks up on an investment concept, it's time to head for the exit. The reason for that attitude, of course, is that most of the folks writing for the dailies fall into the trap of using past performance to some how predict what is going to happen in the future.

    Investors who take a more thoughtful approach are the ones who already bought at the bottom of the upward path that those journalist finally notice. The investors who get in early usually take advantage of this looking backward approach as a convenient exit strategy. They then move on to the next investment, before it establishes an obvious upward trend and attracts the popular press.

    This time around, the dailies may be in early enough to have a meaningful impact. The gold price is likely to go lot higher. But as I explain later in the Gold Market Update, that move in the gold price will probably not happen right away, and it won't move straight up. Most importantly, the move in the gold price won't impact on all companies equally.

    Most of the well-known companies in the gold industry already reflect the current gold price, or even a gold price somewhat higher than the current level.

    The tidal wave of investor enthusiasm has now also passed through the mid-tier, hitting quite a few of the good companies in that group as well. That wave has already started to lift the companies with advanced-stage gold deposits. Many of the companies with good exploration projects will also enjoy a lift in share price as that sector will be discovered next. The real excitement will come as some of those companies announce good news from drilling programs over the coming months.

    TMy mission in life at this time is to identify the companies with the best prospects of delivering good exploration results - the companies with potential for 10-for-one or better payoffs, as well as some of the mid-tier companies that still offer good value

    This issue updates some of the previous companies introduced here, and also presents a couple of new companies that I believe have potential to deliver big returns.

    Gold Market Update

    The gold price is going to go higher yet, but it may take some time. And, it definitely is not going to go in a straight line. The gold price chart, demonstrates the upward ratcheting of the past year, and presents a very clear picture of what to expect in the coming months.

    The gold price is now being propelled upward by investors growing increasingly nervous about various aspects of the world financial systems. At the same time, there are other forces keeping the price in check.

    First, the central banks of the world, which still control a very large amount of gold, do not want the gold price to get out of control. It is almost certain that they have accepted the inevitable - that the gold price must move higher, closer to its long-term equilibrium level. The central bankers just want that process to be gradual, to give the financial community time to adjust.

    To understand why time is needed to adjust, consider that the U.S. commercial banks held $63.3 billion of "gold derivatives" at the end of last year, according to the Federal Government's Office of the Comptroller. Much of that so-called "derivatives" positions is actually "shorts". A sudden run on the gold price could spell financial disaster to some large banks, and create chaos in the financial community.

    The other important factor in the gold market is the retail consumers, those people who buy the greatest portion of the gold that is sold around the world each year. In general, the retail market is quite sensitive to price. The gold buyers, especially at the wholesale level, stand back from the market when the price spikes, waiting for the inevitable pullback, even if that price is a notch higher than the previous pullback level.

    It is inconceivable that the gold price will fall a long ways from here. A year ago, the price was pushed down to $252, primarily because the short sellers were creating a self-fulfilling prophecy. As I pointed out at that time, the downward momentum hit a brick wall at that level. The price simply will not go below the industry's average cost of production. Even the most foolish of the gold company hedgers know that they're better off shutting down their mines than locking in a gold price lower than their cost of production..

    Gold has been an important part of civilization for at least 6,000 years. There is absolutely nothing to indicate that our love affair with this metal will suddenly end. On the contrary, the largest consumer of gold in the world - India - is enjoying growing prosperity. China has a similar attitude towards gold, but many people in that country had difficulty buying gold in the past. The recently opened gold exchange in China will make it easier for Chinese citizens to buy gold. That nation of 1.25 billion people is enjoying an economic boom, as it quickly becomes industrialized. More wealth in the hands of those people will certainly translate into increased demand for gold.

    In the West, the economic slowdown in the last couple of years has reduced demand for luxury items like gold jewellery. That slower retail demand for gold has been more than offset by the increased buying coming from investors.

    The Japanese, facing the possibility of a banking collapse, have been big investors in bullion. Many Americans are also stashing away a little gold in the face of declining trust in corporate America. There's also a lot of concern that the U.S. dollar will continue to decline in value relative to other currencies. A further decline in the value of the U.S. dollar will translate directly into an improvement in the gold price.

    In the face of so much uncertainty, everyone should own some gold, or better yet, gold equities. Gold will hold its value, or more likely appreciate if there is further difficulties in the financial markets.

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