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The Final Hurdle for Gold May Have Been Passed

Commodities / Gold & Silver 2009 Feb 12, 2009 - 10:00 AM GMT

By: Q1_Publishing


Best Financial Markets Analysis ArticleBloomberg declares, “ Gold Soars to Highest Since July.

A Wall Street Journal headline proclaims, “ Gold is Flirting with $1,000, Again; ‘There's No Sign of the Market Tiring.'”

Yesterday gold surged another $30 an ounce surpassing $930. And the mainstream media is getting on board in a big way.

Now, we can debate all day whether this is the time gold runs back to $1,000 and beyond. Or whether this is just another short-lived bounce which could run out of steam at any moment. Frankly, the exceptional volatility of the gold market has taught me only time will tell.

What I can tell you is that there has recently been a change in gold – at least the perception of gold. A dramatic change. One that could set gold and gold stocks on a long march higher. Yet, the mainstream media have completely glossed over it. Let me explain.

Gold Goes Big

You see, gold's a funny thing. It elicits such an emotional response. Gold has had a pretty volatile year. The yellow metal started attracting a lot of attention when it passed its early 80's highs in 2007 and has been up and down since. Lately, it has had more ups than downs. Despite all the recent attention, we're still right back where we were when gold passed $900 over a year ago.

Whether you're an all out “gold bug” who has been waiting a long time for this run, you question the value of gold because it has very little industrial use (ala Warren Buffett), or somewhere in between, you've got to take a look at what has happened to gold in the past few weeks.

But here's the thing, this time around there's interest from some very big money investors. The big money is now considering gold a viable investment again. It's not just the hyperactive, hot money hedge funds batting around gold anymore. Now pension funds, mutual funds, and other institutional investors are betting on gold – in a big way.

That is the big difference this time around. The big money interest hasn't been there for decades. It looks like that's starting to change – quickly.

Big Money Bets on Gold

Unprecedented sums of money have been pouring into gold in the past few months. While a lot of funds are licking their wounds from the recent downturn and facing ongoing redemptions, some still have money. Those that do are putting it in gold. At least part of it.

Just take a look at the recent money which has been put into gold companies across the board. They're all getting new cash. Major miners looking for extra cash to fund takeovers, exploration, and mine development are getting it. Small gold companies looking for one more financing to put themselves into production are getting it too. There's money out there for gold.

For instance, Newmont Mining (NYSE:NEM) is expecting at least $1.7 billion (or more depending on the final terms of agreement) in new cash in its coffers. The cash infusion will come from the sale of stock and convertible notes. That's billion – with a “B.”

Leading the charge in putting this financing together was Citigroup, J.P. Morgan, and BMO. They're the big money. And they (except for BMO) wouldn't have given gold the time of day when private equity players were chasing after real estate, Chinese companies, and other “hot” sectors over the past few years.

Of course, it's not just one big deal though. It's lots of them. Industrials may be going under because they can't get financing. When it comes to gold companies though, there appears to be plenty of money available.

In the past few months there have been a slew of financings of gold companies. Together Yamana (NYSE:AUY), Agnico-Eagle (NYSE:AEM), and Kinross Gold (NYSE:KGC) have attracted more than $800 million in new money.

Even gold companies which were pretty much left for dead during the credit crunch are getting the cash they need. Shares of Osisko Mining (TSX:OSK) dropped well below $2 per share in November amid concerns the company wouldn't be able to get the cash necessary to move forward with its prospective gold mine. Three months later shares are trading above $4 after hitting highs of over $5 per share. And it now has the money it needs. NovaGold (AMEX:NG) went through a similar ordeal. Its shares dropped all the way to 37 cents only to climb back to close at $3.52 yesterday.

These are just some of the bigger deals. We could highlight the dozens of smaller deals which are or are about to get some new capital, but you get the point. There's big money backing gold now.

In a way, the whole gold situation may have changed.

A “Frightening” Change

Two weeks ago Peter Munk, the Chairman of Barrick Gold (NYSE:ABX) – the world's largest gold mining company – identified an “unpleasant and frightening” trend. Munk said in an interview with Bloomberg:

Munk said he has received an increasing number of calls from wealthy investors looking for ways to buy bullion. While that is positive for the metal market, it is a “sad part of a civilized society.”

“That's not where you want to be, it's alarming. Do I personally believe gold will break through $1,000? It's not a question of if; it's a question of how soon.”

You've got to remember Munk is the chairman and founder of a gold company. So he has long experience in gold. He also has access to the inner workings of the gold market. But he also benefits from rising gold prices too.

Despite the potential conflict of interest, he is definitely right on that change has taken place.

What Really Matters About Gold

As long time Prosperity Dispatch readers know, I hate talking about gold. When it comes to gold, everyone has an opinion. It's usually a very strong one. And not too many people will think about creating some argument for argument's sake. There's very little middle ground when it comes to gold.

Just to be clear though, I'm not a gold bug. I'm not about to predict gold is going to $1,000 before it goes to $800. There are just too many variables driving gold lately. And I think a world with $200 gold is a much better place to live in than a world with $2,000 gold. But the recent big money push into gold could mark a significant change in the prospects for gold.

In the end, it all comes down to whatever the markets believe. Perception is reality. And a lot of money is betting gold will be perceived as more dearly down the road, whether deflation or inflation wins out.

Over the past few months, deflation vs. inflation has been a popular subject of debate. While $60 trillion of wealth has been wiped away in this downturn, central banks are going all out to print enough new money to prevent the inevitable deflationary effects of the losses. And as we've noted before, all speculative bubble-booms end in deflation.

That doesn't matter now. The current theory is gold will win either way. Deflation or inflation, it doesn't matter. Gold win's during inflation because it's a store of value. Gold wins in deflation as central banks debase their currency.

As a result, there's demand from both the inflation and deflation camps. And, in the end, it is perception of value is what really matters for gold (and every other financial asset for that matter).

For decades, the big money refused to view gold as anything other than something horded by conspiracy theorists. The lack of big money interest was a huge hurdle for gold. Now, with the billions of dollars headed into gold from leading U.S. institutions, it appears the hurdle may have finally been passed.

Good investing,

Andrew Mickey
Chief Investment Strategist, Q1 Publishing

Q1 Publishing is committed to providing investors with well-researched, level-headed, no-nonsense, analysis and investment advice that will allow you to secure enduring wealth and independence.

© 2009 Copyright Q1 Publishing - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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