Is It Time For Gold?

Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Never Stops Going Up

From 1913 to 1971, the price of gold went from $18.92 an ounce to $40.62 an ounce. But after the Bretton Woods system was taken down in 1971, the price of gold started to skyrocket. It went from $40.62 an ounce to $871.96 (average gold price in 2008) to $1,571.52 (average price in 2011) to over $1,700 today. It seems that within the last 10 years the price of gold has been unstoppable and has continuously gone up regardless of market trends. Are those prices here to stay, or is gold going to keep up its momentum?

Central Banks Play Their Part

Historically, central banks have been net sellers of gold, but that is starting to change. Now more and more nations want to protect the value of their currency with gold and are starting to become net buyers of the metal. In March, Russia bought 16.55 metric tons (583,778.08 ounces) of gold, Mexico bought 16.81 metric tons (592,949.216 ounces), Turkey bought 11.48 metric tons, (404,940.928 ounces), Argentina bought 7 metric tons (246,915.2 ounces), and Kazakhstan bought 4.3 metric (151,676.48 ounces). China is also a large purchaser of the metal, but they don't release data on their gold purchases that often. The last time they updated it was in 2008 when their gold supply went from 500 metric tons to 1,054.1 metric tons. State officials from a special task force in China have said that in order to protect the value of their currency they would need larger gold reserves, somewhere around 6,000 metric tons in 3 to 5 years (from 2008) and 10,000 metric tons in 8 to 10 years. Gao Wei, who is a state official in the Chinese Department of International Affairs, also said that China's gold supply was "too low" and that China should buy low and sell high in the current market volatility, recognizing that gold prices were high, but that China would keep buying it. China's production has gone up quite significantly over the years, from 1 million ounces a year in 1981 to over 10 million today. That extra production is mostly going into China's central bank, with some of it being made into jewelry and sold to China's elite. As long as central banks remain net buyers (especially China) and not net sellers, gold prices will continue its rise.

Predictions

Barrick Gold (NYSE: ABX) sees gold prices spiking upwards in 2013 and hitting $2,000 an ounce in 2013. HSBC raised its gold forecast to $1,850 an ounce and said that by the end of 2013 gold could touch the $1,900 level. The premise of their reasoning was that central bank bulk buying, more jewelry purchases, and rising production costs would push the price of gold higher. While I can't tell you with absolute certainty what the price of gold will be in a year, most are fairly bullish.

Ways To Play

There are several different ways to play those rising prices. One way is to buy up a gold ETF like SPDR Gold Trust (NYSEMKT: GLD). Or you can invest in the gold miners themselves, like Barrick Gold Corp. Currently Barrick's gold production rate is 7.7 million ounces (a year) at a total cash cost of $460 an ounce. For 2012, Barrick sees production going down to 7.3 - 7.5 million ounces at a total cash cost of $575 - 585 an ounce. Those rising production costs are why Barrick sees gold prices rising higher. Now that picture doesn't look too bright, not until you include the fact that Barrick sees its gold production rate going up to 8 million ounces by 2014. This will happen once Pueblo Viejo is fully operation and adds 625,000 - 675,000 ounces of production at a total cash cost of $300-350 ounces for the first 5 years of production. What Barrick really needs is higher gold prices, which dramatically increases its margins and return on investment. If you are bullish on gold prices Barrick is a great way to play. Another gold play is Newmont Mining (NYSE: NEM). Most of Newmont's production is gold, and from 2007 to 2011 their operating margin went up from 16% to 44% as gold prices went higher. If gold prices do hit $2,000 like some suppose it will, then expect good news from Newmont.

Final Thoughts

With Central Banks becoming net buyers of gold and China on a never ending quest to prop up its currency and have one of the largest gold reserves in the world, combined with the printing freezing countries like Japan, USA, and Europe are going through, gold prices look like they will continue their surge upwards into 2013. Things like quantitative easing will devalue the dollar and push commodity prices higher, uncertainty will cause investors to buy up safe haven assets, negative real interest rates will punish dollar holders and "nudge" them into gold, and higher gold demand for jewelry all bode well for gold miners and investors in the gold industry. I’m Bullish on gold.


callumturcan has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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