The price of gold has been trading somewhat commensurate with the main stock market averages. It’s a peculiar time for most precious metals, but I feel strongly that gold will be an important holding over the coming years.
In fact, I would even venture to say that the current environment now seems like a good time to be considering taking on a new position in the commodity.
Both consumer and industrial demand for gold has actually been growing steadily in recent history and the current bear market in stocks is really setting the stage for the next big gold rally.
It all started with the credit crunch and the forced liquidation of stocks and other securities. Just like most other stocks, gold stocks, along with the spot price of the commodity, have been sold hard and prices are now low. With investor sentiment continuing to be very weak, it’s a very difficult time for a gold producer to raise new capital to expand.
Credit terms are tighter and issuing more shares is very unattractive. This means that exploration and development for new gold deposits is going to be hampered over the coming years, meanwhile demand for the commodity is rising steadily. In my mind, it’s the makings of a new bull market in precious metals. This time, however, the catalyst is the supply side of the equation.
There are actually very few gold stocks in the marketplace that I think are worthy of consideration. Investors can make money speculating in smaller resource companies, but I’d stick to the big producers. They have the staying power in an otherwise high-risk industry.
The rationale for a new bull market in gold can also be applied to a basket of other commodities. The same situation has happened to silver and zinc. New oil exploration seems stunted. This is why the credit crisis will have such a lasting and significant effect on the global economy. Capitalism depends on credit and investment in order to advance. Without the availability of capital, the whole system breaks down.