What’s Driving Gold?

kitco ^ | January 4, 2006 | Frank Holmes

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These are good times for gold investors, according Frank Holmes, Chief Investment Officer for U.S. Global Investors. In a recent webcast, Holmes told listeners: “We have a unique situation where all critical drivers for gold are pointing in the same direction.” Holmes identified six key drivers and talked about why they are all pointing to higher gold prices.

”There are many components here that are driving gold, and they sort of rotate around,” says Holmes. “It’s not linear.”

Currently, we are in a secular bull market in commodities because gold is the ultimate money, says Holmes, and because demand is now exceeding supply. “When paper money is being printed at an extreme rate, gold becomes more significant as a reserve currency,” says Holmes. “It starts to show up in people’s portfolios, and in governments.”

According to Holmes, gold prices are currently being driven higher by:

- Fear of a slowing GDP, which leads to negative real interest rates. Gold is attractive when real interest rates are negative. Currently, there is a global wide fear of a slowing GDP. Historically, when Americans have been concerned about inflation, the price of gold has surged.

- Oil exporting countries are increasing their percentage of gold reserves. There has always been a strong interrelationship between gold and oil, and historically, gold and oil have always moved in the same direction. “With 3 billion people consuming 20 million barrels of oil per day . . . it is more likely that gold will rise before oil falls, because oil won’t fall much,” says Holmes. Russia announced in November plans to double gold reserves as a portion of all of its reserves, from 5% to 10%.

- China, which now has a trade surplus, is increasing its foreign reserve gold exposure. Incomes are increasing dramatically in China, and citizens are becoming big consumers of American and Chinese goods. The new Shanghai Gold Exchange, combined with the liberalization of citizens to freely buy gold and the culture’s affinity toward gold, make gold an attractive asset.

- Low gold prices in the 1990s led to cuts in exploration and falling production – which has ultimately led to a decrease in supply.

- Lower interest rates have curtailed hedging – which also has led to diminished supply.

- The War on Terrorism has resulted in deficit spending and a weaker U.S. economy. The cost of war is hard on a country’s currency, and a weaker U.S. currency always results in higher gold prices.

According to Holmes, the supply side of gold is running at a significant deficit to demand. South Africa, the U.S. and Australia – which combined represent 36% of gold mining supply – have all seen declines in gold production. The world’s largest gold companies can’t find large deposits, and rising energy prices have hurt the cash flow margins of most large producers.

With the key drivers all pointing toward higher prices, Holmes says a gold price of $600 to $650 over the next 12 months is a “high possibility.” (January 3, 2006)

[edcoil]

What’s Driving Gold?

A gold cart...

[Nachum]

If Gold gets high enough, it will bring gold mining companies to life, get people to melt down and sell everything of gold they have. There will be so much gold in the market, there will be a glut.

[governsleastgovernsbest]

”There are many components here that are driving gold, and they sort of rotate around,” says Holmes. “It’s not linear.”

Sounds like the same kind of fuzzy stuff you'd hear from a religious charlatan pushing a cult. Hmm, come to think of it . . .

[governsleastgovernsbest]

Fear of a slowing GDP.

This is a classic example of how, for the gold charlatans, it's always the perfect time to buy gold.

Here he argues that if the economy is slowing, it's the right time to buy gold. And if the forecast were for strong growth? "There's fear of inflation: buy gold!"

[rellimpank]

--the usual sort of commentary on the only commodity of which virtually all that has ever been mined is still available--

[earplug]

If you would reread the article, gold has been driven up by the devaluation of paper money.
Its the printing press value compared with the metal.
When somthing is melted down and exchanged, the amount above ground does not change.
If mines are opened up and more gold hits the market, it will be to supply demand.
As we live in a global economy many exUSSR citizens remember the fall of the Ruble. I have a Russian friend who's salary is pegged to the dollar. They are buying gold to protect themselves from a dollar decline. The Euro is not safe either.

[Petronski]

Shiny metal god!

[hubbubhubbub]

True. The biggest question is, a what price to we have to get to in order for there to be a glut. In 1980 it was $850.

[Species8472]

From the Anchorage Daily News

: -snip-

Pebble ore find expands outlook
ENORMOUS: Grade of minerals in new discovery on claim's eastern edge called richer than main deposit.

By PAULA DOBBYN
Anchorage Daily News

(Published: December 30, 2005)

A Canadian company hoping to develop the giant Pebble gold and copper deposit near Iliamna found so much more minerals there this year that executives are revamping the project and will delay seeking permits for at least a year.

Northern Dynasty Mines says it found an enormous amount of gold, copper and molybdenum on the eastern edge of its claim block during recent exploratory drilling. The company says the grade of the minerals is even richer than in the main Pebble deposit, 236 miles southwest of Anchorage.

The company plans to announce more drilling results shortly, said chief operating officer Bruce Jenkins this week.

If studies and new exploration next year confirm what Northern Dynasty hopes and if the economics work, the Pebble development could end up much larger than originally thought -- both an open-pit more than 2 miles wide and an underground mine.

"The drilling program at the end of this year produced some unexpected and incredible results," said Jenkins. "It's confirming an entire new deposit to the east."

Northern Dynasty already describes Pebble as North America's largest gold deposit and second largest copper deposit, with estimates of 26.5 million ounces of gold and 16.5 billion pounds of copper. The new finds could make Pebble a mine of even more gargantuan proportions.

Wow factor aside, the idea of developing a mine near Bristol Bay is thorny, to say the least: Pebble is located in the headwaters of the world's largest salmon fishery. Building a mine poses huge environmental risks and threatens sport and commercial fishing industries, making it a high-stakes project of enormous public interest.

-Snip-

[Jack Black]

$850 inflation adjusted is about $1700 now. I'm good with that. I'll sell before we get there.

[headsonpikes]

The gold bugs incessant harping on the depressed price of gold has put off most mainstream investors. Even if one believed them, who wants to put heavy dollars into something that the government can so easily manipulate or seize?

This has kept the gold market in a state of constant disbelief as the price has risen inexorably over the last while. Such fear is an excellent indicator that the gold market has not seen its highs.

For those who like gold, buy the stocks, not the metal. Should gold double from here the stocks will triple, quintuple, and more. If you follow the Canadian markets, you know that after a long delay, the gold train is finally leaving the station. ;^)

[Tijeras_Slim]

Did you know those darned Asians are buying all the gold? :)

[Toddsterpatriot]

because gold is the ultimate money

Right. LOL!

[hubbubhubbub]

LOL, You sound like someone who's mad because they don't own any. Relax, your government controlled money will still be good just not worth as much in the future.

[hubbubhubbub]

I own some shares of NAK. It's done very well for me.

[Nachum]

When somthing is melted down and exchanged, the amount above ground does not change.

Not true. I used to trade in silver and gold. I remember when the Hunt brothers drove the price of silver up. Gold is a commodity and there most certainly is production of gold in the market. When large amounts of Gold is poured into the market, the price is affected greatly. Remember the part about "gold mining"?

While there is a finite amount of gold, we have yet to know what that amount is. Of course the devaluation of the dollar inflates the value of things, but like all commodities, gold is affected by other factors, not only the value of the dollar.

[hubbubhubbub]

And as the $CN rises against the $US your gains are enhanced.

[Toddsterpatriot]

I pity the fool who doesn't buy gold.

[RightWhale]

Gold is moving with aluminum, copper, and oil.