Gold is making regular headlines these days as global economic uncertainty remains high and the yellow metal recently reached record prices of just over $1,900 per ounce. Since a sharp correct where gold gave back over $200, the price has recovered and gold is currently trading around $1,885 per ounce.
Goldman Sachs said it expects gold prices to continue to climb in 2011. The U.S. based investment bank cited the current low level of U.S. real interest rates, European debt issues, balancing inflation with growth in China, and mixed data from several major economies as drivers for gold’s continued appreciation. “We recommend near-dated consumer hedges in gold,” stated analysts at Goldman Sachs and they expect further price increases later this year and into 2012.
According to Citigroup, a resurgence in investment demand has fueled gold’s rally over the past decade. Investment demand has grown from 4% of total demand for gold in 2000 to over 39% in 2010. “We caution that this very aspect that provided support for gold over this time may result in its downfall going forward,” noted Citigroup. “Even a slowdown, let alone a decline, in net investment flows can have a materially negative impact on the gold price from current levels.” So whether you are a gold bug bull or a gold bubble believer, one thing is for certain, there is no denying gold’s captivating run.
With all the excitement around the price of gold let’s not forget gold equities. Tye Burt, President & CEO of Kinross Gold (TSX:K) may have crystalized the argument for gold equities best when he stated in a recent interview with CNBC, “Gold price is up 25% year-over-year and our earnings effectively doubled. There is a leverage in the gold producers which will play out in their equity prices.”
Can the price of gold keep rising? Talk to gold bugs and they will tell you key drivers such as political instability and inflation are bigger issues today than when the yellow metal began the stellar rise that tripled its price in half a decade.
But gold has its critics, and their rebuttal was crystallized by Warren Buffett who said he would rather own “all of the farmland in the United States, 10 Exxon Mobils, plus have $1 trillion of walking-around money” instead of all the gold in the world. In the meantime, gold bugs have been gaining adherents from the world of economics. Former Fed Chairman Alan Greenspan, for instance, believes there is increasing evidence that economies do better when pegged to a gold standard, as the US was from 1870 to 1914.
The Economist’s Edward George takes a more practical view of gold’s rise. He doesn’t “…believe the price can fall below U$800/troy oz for long, as over half of current gold mining operations are only profitable at a price of at least US$1,000/troy oz. If the price falls below this level for a long time they will simply stop producing, reducing supply and ultimately driving up the price again.”
The rising tide of gold prices has lifted most all the boats in the public markets. Some gold miners, candidly, aren’t sure the price is sustainable. Others have delivered huge margins by behaving as though the price of gold hasn’t moved, making smart acquisitions, removing hedge and keeping their cost of production down. As we approach the Ides of March it appears gold and gold companies are set to have very interesting 2011.
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