Article originally posted on 23-FEB-07 23:00′ GMT – Archive
LONDON (Mineweb.net) –The gold bulls are out there cheering the metal price on. With even the pessimistic forecasts for 2007 showing only a relatively minor price downside, the bulls think they are in for another year of rising prices – and they may well be right.
This week’s surge in price has been an interesting one. After some minor weakness, mid-week saw the metal price rise $24 in a day, followed by a fairly flat period and a little profit taking waiting for a further upwards take-off, which occurred on Friday. It is interesting to note that the speed of the rise has certainly taken some observers and experts by surprise.
Yet perhaps observers shouldn’t be too taken aback. There’s a fair sector of the investor population, including a number of long term followers of the gold price who feel the yellow metal is in for an extended bull run which will keep it going up on average for the next two years at least. Some of the more cautious bulls, if that’s not a contradiction in terms, had been anticipating a run back up to $700 at the end of 2006. It didn’t happen and the price fell back to close to $600 at one point in early January, but since then gold has been making continuing progress. It is probably not sticking one’s neck out too far to suggest that last year’s May London fixing high of $725 may be breached before too long.
For the latest predictions on gold price trend see the video below:
Continuous gold price upwards push?
Don’t expect a continuous upwards push though. Rising price patterns suggest that at some point probably a third of peak gains will be lost as a correction and as investors take profits – so if say a temporary peak of $750 is reached – an increase of around $150 from the January low – one could expect a fall back of around $50 at some stage, which would present a good buying opportunity as most factors seem to point to a continuing overall rise this year and next. If you are interested in a gold IRA rollover – read more here. For general information on how to buy gold, read this article.
Look at the fundamentals. Gold production is slipping, industrial demand is rising, jewellery demand will be resilient once it is recognised that higher prices are here to stay for a bit. Miners are less inclined to hedge production forwards, while Central Banks seem to be more reluctant to sell – indeed there is the possibility of Central Bank purchases as reserves are diversified away from the US dollar which is perceived as remaining weak because of the enormous, and ever rising, balance of payments deficit.
If one agrees with this scenario, then investment in bullion (or ETFs) and/or gold stocks has to be a positive option. But which will serve you best. Bullion and ETFs are probably safest offering, perhaps, less downside risk. Or should you, as Pierre Lassonde of Newmont suggested this week, buy gold stocks. Traditionally stocks carry a greater gearing (leverage) than the metal itself, but this works both ways – up and down!
Buying gold stocks like Barrcik or Newmont
In truth, buying one of the gold stock majors like Barrick or Newmont is a bit like buying the metal. It’s a pretty safe option offering good gains if the price rises – and at least will generate dividends which holding the metal won’t – but again the broader diversification of these stocks as most are not 100 percent pure gold plays offers some limitation in losses should prices fall.
The big gains (or losses) are therefore likely to be in perhaps more speculative stocks, and if one does one’s homework well then there has to be a good chance of beating the odds and doing very well indeed should the market scenario be as suggested earlier. However the factors which make the stock speculative are those which may have kept the more cautious investor away in the first place. Political instability, low grades, small profit margins all increase the risk elements dramatically, but can also increase the returns if things go well and the gold price stays high. Look for companies with a good resource in a politically stable environment (you can check out the best companies in our comprehensive review). We can only recommend Regal Assets and Advantage Gold.
It’s also worth looking at straight silver, or gold and silver plays. Silver, if anything, has been outperforming gold over the past year, although basically it has been moving very much in line with the yellow metal. In some respects it could be said that silver is more vulnerable than gold to a downturn. Fundamentals are rather different, but as long as silver continues to track gold there are probably more stock bargains to be found in this sector.
But, as financial advertisements have to warn us, stocks – and metal prices – can fall as well as rise. Precious metals are notably unpredictable – but to this observer they do seem to be set on the upward path – at least for the time being with stocks offering a little more than metal or ETFs.