Gold Investment Demand

What's driving Gold Investment demand today...

BACK IN 2001, writes Byron King for the Rude Awakening, gold traded as low as $250 per ounce.

Then, over time, gold rose slowly, but steadily, as investment demand rose, reaching just over $1,000 per ounce early in 2008. Gold pulled back and hovered in the range of $800-900 for much of 2008 and then climbed back up to the $1,000 mark again in February 2009.

Despite a pullback in March, it looks like gold wants to break the $1,000 mark again...and stay there. Indeed, the Gold Price may see $2,000...even $3,000 I believe...in the next two years.

But before we get to that, let's explore a few of the driving forces behind Gold Investment and its once and future position as the ultimate hedge against government-sponsored fiscal idiocy.

Along with the generally rising Gold Price trend, demand for physical gold is heading toward record levels this year. Worldwide mine output is almost entirely locked up. Smelting and refining operations are running flat out, if they can get their raw materials. Mints around the world, from the South Africa Mint near Johannesburg to the US Mint at West Point, are booked solid.

The increase in demand for Gold Bullion is remarkable. It's occurring during a period of relative strength in the Dollar, and when investment in other types of commodities has all but collapsed. Then again, the decline in other commodities has spurred the rise in Gold Prices, as well as a rising price for silver. That is, much of the world's gold and silver comes as a byproduct of copper mining. Much more of the world's silver is a byproduct of mining lead and zinc. But copper, lead and zinc operations have all scaled back dramatically in the face of the worldwide recession and credit freeze. So there is less gold and silver coming from the mouths of the mines.

The increase in gold exchange-traded funds (ETFs) like streetTRACKS Gold has also been dramatic. The ETFs advertise that they buy physical gold and silver, to reflect a 1-for-1 investment of funds for metal. This is not entirely true, I believe, in that ETF holdings of physical metal are almost surely less than the stated amounts, just due to the difficulty of securing metal from the refineries.

Still, ETF holdings are rapidly approaching half of the world's annual mine supply. According to a recent estimate by Citigroup, "If ETF inflows continue at current rates, investments will be 1,900 tonnes in 2011, at an implied price of $1,300 per ounce." Based on public statements by Gold ETF managers, the business model is to get to 100% full backing of all ETF financial assets with physical metals.

In the current environment of massive government spending worldwide, many savvy investors and institutions see a fearsome, systemic threat to the broad financial markets. This drive to find relative safety is part of the movement to acquire and hoard physical gold and silver. Thus, the demand for Gold Coins and bars should hold steady or increase, and "safe-haven demand" will support higher prices – potentially much higher prices – for precious metals.

It's fair to say, however, that the bullish trend in gold and silver has crowded the trading pits. So any investor in precious metals has to understand that signs of stability, particularly a return of market confidence, will almost certainly cause a quick pullback in gold and silver prices. But in my view, any period of weakness is likely to be short term. There is just too much future inflation already baked into the world's monetary pie.

One important commentator on Gold Prices is Peter Munk, founder and CEO of Barrick Gold, the world's largest gold-producing firm. Recently from Switzerland, Munk expressed optimism about gold. "I have to think [Gold Prices] are going to be significantly higher than last year, just like last year was higher than the year before," Munk told Reuters News.

According to Munk, the recent injection by the Federal Reserve of new currency into the money supply is an "enormous, enormous inflationary factor" for the Dollar. This will make gold and silver "more and more desirable." In addition, "Gold has got a very strong and stable support right now as long as we have this enormous uncertainty out there. And I think this uncertainty will probably last for a while, because I don't see any major catalyst that can turn this around."

Finally, Munk said, "Every year in the last three years as the world becomes less and less secure in terms of normal investments and people lose faith and confidence in bonds, stocks, secured debt instruments, people turn to gold. It automatically attracts people in direct proportion to their fear, and that is fear of losing their money."

Founded by Munk in 1983, Barrick Gold is among the world's largest gold miners. Barrick has pursued growth through judicious expansion and a continuing process of acquisitions. "Barrick has grown," said Munk, "primarily through an aggressive acquisition program in the last 25 years. So of course, we'd be on the lookout all the time for strategic acquisitions or mergers...The major gold deposits throughout the world in the main have already been found, so it's getting more and more difficult, and that's why you see global gold production heading downward, despite higher prices and increased spending on production."

According to Munk, Barrick is unlikely to diversify further into base metals. But Barrick will likely recover larger amounts of copper as it mines for more gold. "It is inevitable that [Barrick's] copper production will grow," he said. "If the world straightens itself out and we resume growth and expansion – and I don't think we will, by the way, not on the short term – then copper is a wonderfully profitable base metal to mine."

The bottom line in all of this is that you should be sure to pad your portfolio with gold and silver, both the physical metals and shares in quality mining companies. The future is bright for gold and silver.