Tuesday, September 14, 2010

Why Buy Gold Stocks? Australia Gold

For profit and wealth protection. Gold mining companies have done extremely well over the past ten years and in particular since the 2008 credit crisis, commonly known as the Global Financial Crisis (GFC). Many investors have made well above average returns investing in gold mining companies and gold itself during this time. The opportunity has not passed because the underlying reasons that have caused this bull market have not been fixed.

But isn't gold just a useless pretty rock? Obviously not as Central Banks, wealthy investors and corporations have been buying gold right up to this date. Gold has proven to be an essential Central Bank asset as protection against currency fluctuations and to provide confidence in the banking system.

Since 1981 houses in Australia are up at least1700% (17 times) and yet gold is only up 47% since 1980 at the writing of this piece (13th September 2010) even though gold was at a record high in early 1980. Gold reached its low of US$252.45 in August 1999 making a second low at US254.35 during February 2001. I was there in 2001 investing in gold stocks and trying to highlight the opportunity to everybody around me. I eventually started work on GoldOz in early 2006 in frustration that few if any would listen.

I was also there in the second half of 2003 buying silver and again nobody would listen to me. It was under US$5 at the time. So how well have Australian gold stocks performed since then? Australia's largest gold company, Newcrest Mining Ltd, sold as low as A$3.00 in April 2001 and has reached A$40.50 in March 2008. That is a 1250% profit.

Oz Minerals Ltd, Bolnisi Gold Ltd, Kingsgate Consolidated and many other Australian gold stocks have done even better from low to high. Educated investors have made staggering profits in the last decade. Do you want to protect your wealth and/or make excellent investment gains over the duration of this gold bull market?

Did you watch the dot-com bubble? Most of the gains happened in the latter stages. Did you watch the last gold bull that ran from 1971 to 1980? Remember, gold was fixed at US$35 an ounce until 1971 and the Federal Reserve Chairman Paul Volcker was able to push interest rates to 21.5% to deal with inflation at that time. This measure is unavailable to Ben Bernanke who now faces the largest global debt bubble in recorded history.

The 70's Bull Run was abbreviated because of the gold fix (to 1971). The problems back then had been brewing for several years before 1971 and therefore if gold had not been fixed it would have been moving upwards strongly years earlier. Financial asset bull markets commonly run for about 20 years and then reverse for a similar amount of time. These counter cycles are when gold really shines. Financial analysis tells us this gold bull will run for the next 5 to 10 years taking this rallyout to a similar time frame. Will the gold stocks do as well or better in the last half of this (secular - long term) rally?

Gold stocks ran up the hardest producing unbelievable gains from the second half of the seventies. Many stocks rallied from under 50c to hundreds of dollars per share. Gold ran as hard as it did in the seventies due to a lack of faith, a lack of confidence in the financial markets of the time. This is just what we face now.

Ask yourself, do you think that debt creation can really cure a debt crisis? Clearly this is ridiculous - such measures can only buy time and makes the problem worse. This is exactly like giving $100,000 credit limit American Express card to a family that has maxed out their other credit cards, have a massive mortgage and expensive car payments that they cannot manage. It buys them time and makes their debt and eventual default even worse.

Of course, whole nations cannot go bankrupt but they can and do default and need restructuring. The turmoil this creates is on a much greater scale. Fortunately in the past this has been a rare occurrence however, unfortunately, now several countries face such a risk at the same time. All the fuss about Greece, Spain, Portugal, Ireland and Italy is only the beginning of this process. Japanese government debt is twice as bad as Greece and similar to some states of the USA.

Stimulus money has to come from somewhere – it has to be paid back. Government borrowing more money they don’t have to stimulate a sick economy creates more debt. This crisis will not go away quickly. The worst is yet to come. The best is yet to unfold for investors who buy gold, silver and the companies that mine them. The future Bolnisi Gold companies are now some of the juniors, developers and emerging producers.

Do you want in? Do you really trust governments and politicians? Will they bail you out or will they bail out themselves and the banks? Who will bail you out if they don’t? I will tell you – only you can protect yourself. As long as this debt crisis lasts gold will be bid, gold will rise. Selecting gold stocks that will produce the stellar gains seen in the second half of the 70’s gold boom is an art – luck will not suffice. The answer is to get information – the best you can get.

Get educated; we hope you can prosper during the difficult times ahead. Now you have to look at timing and that comes down to top down analysis or world events in financial markets.

Good trading / investing.

Source: Neil Charnock

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