$2,000 Gold Prediction

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Hey good news everyone. The heads of state at the APEC summit decided on Sunday to sort this whole Global Financial Crisis. “We resolved that we would aim to overcome the crisis within 18 months,” the Wall Street Journal reports from the statement by the leaders of the 21 Asia-Pacific nations. “Economic recovery is not yet on a solid footing…We will maintain our economic-stimulus policies until a durable economic recovery has clearly taken hold.”

That’s fantastic! Just 18 more months before we can put all of this behind us. Why didn’t they aim to overcome the crisis a year ago? Oh well. Better late than never.

Of course, it is possible the leaders of the APEC nations have no idea what to do, and certainly don’t agree on how to manage their currencies. The Journal reports that everyone is badgering the Americans and the Chinese to quit their cozy currency arrangement. America has effectively devalued the dollar with low interest rates, and the Chinese have matched the devaluation because of the semi-formal currency peg.

The results is a global race to the bottom, otherwise known as competitive currency devaluation. Exporting nations must mimic the Fed and keep rates low (or sell their own currencies and buy dollars) to stay competitive. It suits China and America for different reasons.

America’s weak dollar hasn’t exactly helped exports like everyone expected. In fact, the trade deficit widened last month on a weaker dollar, mostly due to huge oil imports. But as long as U.S. interest rates are kept low, the housing market will not implode. The weak dollar suits the Fed.

And a weak Yuan suits the Chinese for now. They remain the world’s low cost producers. And their goods get even cheaper when the Yuan declines with the dollar. More market share is good for Chinese producers. But it doesn’t make any other exporters trying to compete in manufactured or consumer goods very happy. About the only people, or metal, made happy by the current state of affairs is gold.

The weekend edition of the Australian Financial Review has gold on the cover, incidentally. You can see a picture of it a few paragraphs down. Underneath the giant golden letters it reads, “Why you shouldn’t laugh about gold hitting $US2000 an oz.” But if anyone’s laughing, it’s a nervous laughter.

Why? Well, the fact that the gold made the cover of the AFR confirmed our view that it was an excellent month to research uranium stocks. That’s just what Diggers and Drillers editor Alex Cowie did. He published his first report as the full-time editor of Diggers and Drillers on Friday. It was on uranium, including one specific recommendation.

We talked with Alex about whether to write about gold this month or uranium. Trouble is, he’d already written about gold in October. We’ve been getting a lot of questions here at the DR about gold. The gold price is making new highs in U.S. dollars ($1,123.40 in the futures market last week), but hasn’t carried over into Aussie dollar.

The strong Aussie dollar has capped the Aussie gold price for now. You can read what Alex has to say about it here. The short version, though, is that Aussie investors looking for leverage to higher gold prices ought to look at producers who incur cash production costs in U.S. dollars. This keeps costs under control, but ought to benefit share prices (all things being equal) if gold continues to make new highs.

November 2009
Winter 2006
Gold

Source: The Australian Financial Review
Gold

Source: Diggers and Drillers

By the way, a report predicting $2,000 gold was the very first letter we mailed when we began our financial publishing business in 2006. The prediction seemed a bit crazy back then. And truth be told, the report bombed. That is, very few readers took us up on the offer to subscribe to Diggers and Drillers and see what else we had to say about gold stocks and the resource industry.

And to be fair, the prediction hasn’t come true…yet. Most Aussie gold stocks have lagged the move in bullion prices. And some people still think that gold itself as a genuine asset class is a crazy idea.

The author of the AFR’s piece, Robert Guy, is grudging in his recognition of gold’s recent performance: “Often dismissed as cranks and conspiracy theorists, true believers may have found vindication in gold’s record-breaking run, which has underscored the migration of the mainstream to the long-held world view of these fringe dwellers.”

And then he can’t help himself. “Gold bugs’ dystopian vision of debased currencies, enfeebled banks, debt-burdened governments resorting to the printing press, coupled with the menacing spectre of inflation, presents a worrying analogue to reality,” he adds.

An ‘analogue to reality’? Last we checked, all those things Guy mentions weren’t just prophetic visions. They ARE reality. The real vision – in the sense of a something that appears in fevered recesses of the mind but has no existence in the physical world – is that government-led efforts to revive the economy by taking on more debt have actually worked and that everything is getting better and better.

But then, the idea that investors who buy gold are crazed believers is a convenient way of dismissing monetary history. Close your eyes and pretend everything is all right!

To understand the investment benefits of gold, you don’t have to “believe” in gold in the way that, say, you have to believe in the Virgin birth or the resurrection to call yourself a Christian. You just have to understand how gold has always been part of a sound money system and how it promotes responsible government and personal liberty. It is not an act of faith. It’s a rational conclusion.

Further, gold’s physical attributes – durability, divisibility, transportability, relatively scarcity, and its sameness in all places – make it such a useful medium of exchange. To the extent that those qualities make for really useful money, gold does have an inherent value. Gold is very good money, which is why it’s being remonetised after years in the Keynesian wilderness.

But we’ve written so much about gold in the past you are probably sick to death of it. So we’ll conclude with two points. A sovereign debt crisis is brewing because Western Welfare states refuse to live within their means and are increasing public sector debt. This makes their currencies dangerous to own and their bonds subject to default. At the very least, most paper currencies face major devaluations.

The second point is that gold bullion is not a panacea for the problem of fiat currencies. It’s a good start. But if you think the monetary world will somehow muddle through, then gold stocks give you leverage to a higher gold price. As eye-catching as gold’s recent gains have been, we reckon most investors haven’t begun to stock up and gold.

While the easy money in gold has been made, the big money has yet to be made.

All that said, we think Alex’s timing on uranium is good. Turning to your attention to those asset classes that no one wants to touch is hard to do. For one, you have to be conscious that what everyone is talking about is either fully priced or over-priced. Secondly, it takes some courage to step into a market that everyone hates, or finds so uninteresting that it’s not worth the time.

Granted, uranium does not exactly constitute a hated asset. But it hasn’t been in the limelight lately, has it? There was a small story in this weekend’s Australian, though. Energy Resources Australia’s CEO Rob Atkinson says the pieces are in place for a uranium shortage down the track.

He cited three factors. First, the GFC cut off the capital for new mine development. This happened with oil and gold, too, both of which were facing production peaks anyway. But in the uranium industry, you’ve had major interruptions of mine supply from two sources that were expected to be a lot more productive, BHP’s Olympic Dam and Cameco’s Cigar Lake mine.

On the demand side is the resurgence in the world’s fleet of nuclear reactors, which use uranium as fuel. Of course nuclear power remains controversial in some places (like Australia) even as it figures prominently as part of the energy portfolio in other places (like China and India).

No matter how you “feel” about it, it’s pretty likely that nuclear will emerge as the clear winner as an alternative to hydrocarbons. Who knows what kind of madness the world’s leaders will agree to. The idea that the world can give up burning coal and still maintain a comfortable standard of living is belly-laughable.

But even if next month’s climate change summit in Copenhagen fails to produce a breakthrough (and it already looks like that may be the case), uranium should come out of the summit…er…glowing. And don’t get us started on that summit. We’ve heard the interviews and read the articles. It does indeed look like a massive power grab. But that is a subject for another day.

As an investment issue, uranium stocks present better value right now than some other commodity stocks. One reason is that prices in the spot uranium market have trended between US$40 and US$50 all year. They soared to US$140 along with oil in 2007, but have since fallen, stabilised, and consolidated.

In other words, uranium is one of the assets to resist the rising tide of global liquidity. That doesn’t mean it’s coiled like a spring and will inevitably rise. But there are some good reasons to take a closer look at it now. And Alex pointed out an important fact in his November article: future uranium producers will have to produce above a certain number of pounds per year for at least ten years in order to enter into agreements with the utility companies that buy uranium for fuel.

That means that not just any explorer or developer is going to win the uranium sweepstakes if prices begin to rise in the spot market. And, of course, if global GDP and industrial production again collapse because of a second credit crisis, demand for electricity – including future projections – will go down. Maybe the world will build fewer nuclear reactors than planned, needing less uranium than expected.

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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Comments

  1. As for Uranium, people still haven’t figured out what to do with the waste, the actual energy required to mine, mill, manufacture fuel rods, protect against terrorist stealing it, protecting against accidents, paying for the inevitable major accident, decommissioning costs when the plants themselves only have a limited lifetime before becoming too radioactive to use, —add all those costs up and nukes are not worth it. Do we really need another Chernobyl—or worse? one of the main byproducts of the uranium fuel cycle is so called Depleted Uranium with a half life of 4+billion years, serious chemical toxicity and an alpha emitter, which is almost certainly behind a massive increase in cancer and birth defects in the war zones where it is used in bombs and shells. And as an aside, these states are Warfare states, that destroy people and countries. Welfare is getting cut back more and more. So in conclusion, no thanks, if giving people cancer is a way to boost my portfolio returns, thanks , but I will take a pass.

    Reply
  2. ya, i agree to your comment.

    shafi ismail
    November 16, 2009
    Reply
  3. Just because certain governments dispose of their nuclear waste by turning it into weapons and spraying it all over third world countries does not mean uranium is not a good investment.

    Reply
  4. “A sovereign debt crisis is brewing because Western Welfare states refuse to live within their means and are increasing public sector debt”.

    Some statements are so simple and true that they ought to be branded on the foreheads of every politician or at least over the doors of every government office.

    You want a battle cry — this is it.

    Reply
  5. nickw.
    If you had the loudest of loudest loud speakers these people would not hear you.,these people are deaf ,dumb, blind .,and most of all completly stupid.
    battle cries wont help ,its action from every day people is what is required,but keep yelling out loud, you never know some day maybe someone may hear you.

    Reply
  6. the mass media is pushing to buy gold now. what does it mean? time to get out and sell the stuff!!! i dont know what the hype is all about? aussi dollar get stronger and stronger, 50% up last 6 month… gold only went up 10%… if you wanna make money start to buy US Dollars now… when they carry trade is over US dollar will jump up… always the same circle in this system you buy stuff when nobody wants to buy it and when everybody buys you sell. whats so hard to understand? gold is just another hyped up bubble.

    Reply
  7. “America’s weak dollar hasn’t exactly helped exports like everyone expected. In fact, the trade deficit widened last month on a weaker dollar, mostly due to huge oil imports.”

    As Gomer Pyle would say, surrrprise surrrprise!!! What exports does America have left that are supposed to be helped by the weak dollar?

    Reply
  8. Media mania ? Up(?) here in he UK, The Telegraph are so excited about the price of gold they’ve given up using a spellchecker

    http://www.telegraph.co.uk/finance/breakingviewscom/6587195/Gold-at-5000-an-ounce-Dont-disgard-it.html

    Reply

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