Reasons To Buy Gold

Some recent news:

Last Friday spot gold ended the week at $649.65 per ounce, down by $4.65 or .71%.

The XAU Gold index, a weighted measurement of twenty-six gold stocks, fell 2.31%.

Another Middle Eastern country announced that it was reducing its US dollar holdings and diversifying its US dollar reserves

The Shanghai gold exchange is about to launch individual gold bullion trading allowing individual buyers to take delivery of physical gold.

A survey has indicated that pension fund managers are becoming more aware that exposure to alternative asset classes such as commodities can improve returns and lower risk.

Currently it is estimated that only circa 2% commodities are held in these funds.

GFMS Metals Consulting, an influential independent metal research group, stated in May that the gold price seemed comfortable above US$600 an ounce and if it fell to the $620-$640 range there was a likelihood that trade buying would be attracted.

A price above the 2006 high of $725 could be exceeded during July and December this year with a speculative target of $850 in 2008.

This would still only be just less than half the previous peak in 1980 if adjusted for inflation.

How does this stack up for gold players?

Traditionally the drivers for gold have been inflation, currency collapse, a cataclysmic financial crisis or war.

During this last bull run inflation has been low, the dollar is yet to collapse, there has been no major financial crisis and war has been limited, although costly, to involvement in Iraq and Afghanistan.

The conclusion is probably that the price has been driven upward by increasing demand from the traditional Asian markets as they grow ever more prosperous, the flood of fiat money forcing up the price of virtually every asset class, the diversifying out of the US dollar by the oil rich nations into other assets, including gold, and by the continuing shortfall of new gold production to meet demand.

It is also believed that central banks have cut back on their sales of gold by around 345 tons although the Spanish are amongst the more notable of exceptions.

It is estimated that there are 30,000 tons held in official reserves, this has provided an overhanging threat to the gold price since 2001.

In the present circumstances the sale of reserves at the same tonnage seems less likely at the present time than in the recent past.

With the outlook for inflation becoming less than promising, the gradual weakening of the dollar possibly accelerating as a consequence of the bursting of the US housing bubble and with consequences that are likely to embrace much of the economy, hopefully not the extent of a major financial crisis but possibly severe enough to put jobs and consumer spending under pressure, and no firm time limit on the end of US involvement in the Middle East, the longer term outlook for gold looks good.

In the meantime gold and its producers may have to ride out the storm of profit takers and sellers who are either unable or unwilling to finance their leveraged holdings in the markets in general and those that wary of a precious metals market that has missed out two generations of investors since its last bull run.

After all gold silver and other precious metals and their miners and recyclers have been recognized as speculative and dangerous markets for unwary investors for many years.

With a twenty year break from any serious activity it is no surprise that a great many professional investment managers as well as the man in the street are ignorant of the complexities of precious metals and miners.

Those relatively few who have successfully played this market have seen tremendous profits grow with hardly a stutter in the last five years and with every possibility that the good times will continue, although the odd stutter will not be avoided.

A final thought, where will the hedge and other fund managers turn as their returns on the stock market fail to impress.

The Western stock markets are looking as if they are at or near their peaks and amongst the blue chips and so called safe haven stocks yields are very low, growth among the more speculative may come to halt or decline.

At the same time demand for commodities, both hard and soft, continues to grow, whether to feed the ethanol habit or to meet the demand for better nourishment from the emerging nations, or to provide the necessary metals to keep up with their industrial and domestic building explosion.

In many cases both classes of commodities are or will be suffering from an excess of demand over supply that will force prices even higher.

It is hard to see anything but a very serious downturn in the Western economies appreciably slowing the demands of China, India and other Pacific Rim economies for most hard and soft commodities.

We cannot ignore the fact that Russia, with the worlds second largest oil capacity and colossal reserves of base and precious metal ores, including gold and uranium has entered the affluent society and a lot of basic infrastructure remains to be built before it is comparable to the standard of it’s western neighbors.

Last but not least there are the fabulously rich oil nations of the Gulf spending billions on constructing luxury villas, apartments, hotels and land reclamation for the benefit of the worlds ultra wealthy.

In our opinion it is only a matter of time before the fund managers and other big dogs load up heavily on commodities, the resultant surge in big profits is going to make the savvy early players very wealthy indeed with plenty left over for those who enter the market while many hard commodities (base as well as precious metals) are suffering a mild correction.

As usual we are postulating our own point of view that should not be misconstrued as a recommendation to buy or sell in any market at any time. Our objective is to give you food for thought so please do your own research and draw your own conclusions.