For the last six months, we have been a big supporter of gold, silver and resource stocks. Since March, during the historical bottoming of the markets, we told our readers to follow the smart money and load up on resource plays:
"The big players in the investment business have all come to play ball on the resource sector's home court. Do you want to be sitting in the nosebleeds when the game begins or do you want a spot in the starting line up?" - Playing Ball with Resources April 5, 2009
At that time, we were shunned by many. We were told the bottom hasn't arrived; that the uncertainties in the markets were too great to be placing any bets. To add insult to injury, we were told by some analysts that investing in these plays - especially the juniors - was plain stupid, as financing for these companies was improbable.
To some degree, they were right. Many companies folded during that time. But those who made it past the few rough months...Well, just take a look at the one exchange dominated by resource and mining plays, the TSX Venture:
TSX Venture Chart
Take a look at the two companies we have continually supported:
Teck Resources (TSX: TCK.B)
Teck Resources Chart
Ivanhoe Mines (TSX: IVN)
Ivanhoe Mines Chart
Just imagine for one second that you had invested in either of these companies. Well the big money has. Over $45 billion were put into mining and resource plays at that time. For example, our mention of Kinross Gold when it was nearing its 52-week low of $16.52 has since bounced back to hit highs of over $25.
Needless to say, we are still confident and bullish on resource and mining plays moving forward.
There's no doubt that uncertainty remains prominent in the markets. Looking at the numbers alone, the stock market really shouldn't be at these levels and many are already preparing for a correction.
But think about it this way. If the bubble was to burst once again, there could be another opportunity to participate in the starting line up of another resource bang. If it doesn't, there is still plenty of upside potential in this sector, especially in gold and silver-related plays. (see the Report that Shocked the World)
Follow the Smart Money
We always like to follow the smart money and the big players when making our investment decisions. This year, we followed the smart money that was pouring into the resource sector when all else had failed and the results speak for themselves.
We are not about to change that approach.
Some of the world's best money managers have already taken large positions in gold. Big names like John Paulson, Paul Tudor Jones, and George Soros, are among the many already invested gold. The list of smart money and big-time hedge fund managers investing in gold runs deep.
They're not alone.
Life insurance companies are doing the same. Northwestern Mutual Life Insurance Co., the third-largest U.S. life insurer by 2008 sales, has bought gold for the first time in the company's 152-year history to hedge against further asset declines according to a report from Bloomberg.
Goldman Sachs, probably the biggest player of them all, is predicting that gold will shoot past $1,400/ounce by 2011 on the basis that central banks are becoming net buyers of gold, that gold ETFs are continuing to buy substantial volumes, and that real estate prices will remain depressed.
Right now Central banks are drastically curtailing their sales of gold and many are continuing to buy large quantities. For the first time in 22 years, these banks are net buyers of gold. According to a report by precious-metals research firm GFMS, for the first time since 1987, central banks around the world bought more gold in the second quarter than they sold. They are also bound by an agreement that imposes limits on sales.
Never Forget China
China, whose foreign currency reserves holds $2 Trillion with only 2% in gold (vs. a 10% worldwide average), is still looking to buy large quantities - especially on the dips.
The Chinese are seeing the value of their foreign currency reserves lose value every day and are doing everything in their power to keep their Yuan down. If China makes the logical move to increase its gold reserves and reduce its fiat currency exposure to even just the worldwide average, gold prices could move substantially higher.
China's state-owned Assets Supervision and Administration Commission (Ji Xiaonan, the Chief) said, "we recommend China increase its gold reserves to 6,000 metric tons within three-to-five years and possibly to 10,000 tons in eight to 10 years."
According to the calculations of David Rosenberg, Former Chief North American Economist at Bank of America-Merrill Lynch in New York:
"...if China were to lift their gold reserves to 5,000 tonnes, which is equivalent to about two years of global production, that shift in demand would boost the gold price by $800/oz to around $2,000 ($1,978) based on our models. If China moves towards 10,000 tonnes, well, that would end up taking the gold price to $2,623/ounce if our calculations are in the ball-park."
China isn't the only country continuing to buy gold. India just recently bought 200 metric tons of gold from the IMF, at $1,045 an ounce.
Even small countries such as Sri Lanka and Mauritius are buying large quantities of gold.
Where is the Gold?
While everyone is chasing gold to protect themselves from a falling Dollar, producers aren't keeping up. Gold production was down 3% last year, and it was flat in the most recent quarter. Although mining companies are spending more on new production, especially in China and Russia, that is not enough to offset dwindling output from mature mines. Don't forget China has drastically increased its gold production outputs making it the largest gold producing country.
Aaron Regent, CEO of the worlds largest gold producer Barrick, said that global output has been falling by roughly one million ounces a year since the start of the decade. Total mine supply has dropped by 10% as ore quality erodes, implying that the roaring bull market of the last eight years may have further to run. He continued to say that, "Production peaked around 2000 and it has been in decline ever since, and we forecast that decline to continue. It is increasingly difficult to find ore."
There are simply too many concrete reasons why gold and precious metals will most likely continue their run.
The Opportunity
In the short-term, gold could have its dips (as with every tradable investment) fuelled by a declining stock market which we believe should not be where it is today. If the stock market drops, the Dollar will more than likely rise sending gold down with it.
In the end, however, gold should prevail as inflation kicks into high gear within the next 5 years.
The road to the top will not be a straight line so it only makes sense to take advantage of the inevitable corrections.
Buy on the dips, and sell on the bounces.
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