Precious metal commodities corrected with some fervor—especially silver. The price of gold moved somewhat lower in the recent correction, but it is still solidly above the $1,500-per-ounce level. I think that $2,000 for an ounce of gold is a real possibility over the next 12 to 18 months and it will likely correspond to some sort of currency instability related to sovereign debt. Without question, the sovereign debt issue is the gravest investment risk to your portfolio and is even more perilous than a double-dip recession.
Gold stocks actually corrected more than the spot price and I would be a new buyer of gold shares at this time. This presumes of course that equity investors don’t already have some exposure to this important market sector. The resilience of the spot price of gold in recent months is, in my mind, a strong signal for the future. The U.S. dollar doesn’t really have to go down relative to other currencies for gold to keep ticking higher. The rate of inflation doesn’t have to be pronounced either. All that’s required is just a little bit of everything—sovereign debt worries, a slightly weaker dollar, and two-percent to three-percent inflation—and the spot price of gold can easily break into new record territory.
Investing in gold is a must these days and it’s been a fantastic trade for a number of years already. The spot price of silver did get ahead of itself, as speculators bid that commodity more than any other in the hope of global economic recovery. I wouldn’t be surprised at all to see silver move over the $40.00-per-ounce level in the near future, especially if second-quarter earnings come in solid.
As I say, the gold trade has made for good investing for several years now and my best prediction is for this upward price trend to continue. Right now, there are large, medium and small producers of gold that are trading for reasonable prices on the stock market. A lot of these companies have little to no debt and are sitting on large cash hoards, waiting to put that money into new exploration. I hate to say it, but this decade is going to be a golden age for precious metal miners. It’s a great time to be in this industry, with spot prices high and bank accounts full.
Speculating in gold mining stocks is a difficult business. What I think makes for an attractive investment within this industry is finding a handful of companies that each offer a “package” of good business opportunities. This means that a gold mining company should already be producing and selling ounces of gold with detailed expectations for increased production over the coming quarters. The company should have other properties that it’s exploring, even in conjunction with other, perhaps larger mining companies. There needs to be a track record of financial growth, along with lots of cash in the bank for further exploration activities. Finally, a decent track record on the stock market always helps—this means that institutional investors know about the business and are willing to invest in/trade the stock.
I believe in the commodity price cycle and a fundamental backdrop to support higher gold prices. Accordingly, gold stocks should continue to be some of the best equity holdings over the next few years.