The Six-Year Bull Market No One Is Talking About

Do you know what the best performing investment class of 2006 was? It was gold. Gold bullion climbed 23% in price in 2006 — the metal’s sixth straight year of price gains. I call it the six-year bull market no one is talking about.

Gold bullion started the first trading day of 2001 at US$269 per ounce. The metal closed out the 2006 trading year at US$636 — a gain of 136% in six years, representing a price appreciation of about 23% a year over the past six years. To compare, the Dow Jones Industrial Average would need to be trading at about 26,000 today to match gold bullion’s price performance over the past six years — a far cry from the Dow’s current level of 12,442.

I expect 2007 to be another banner year for gold bullion. Everyone knows by now that China’s central bank issued a warning on the strength of the U.S. dollar in December. But it’s not just about the fragile state of the American currency. China itself is becoming a big player in pushing gold prices higher. Consider the following:

— The SGE (Shanghai Gold Exchange), to encourage smaller investors to participate in gold investing, has just lowered the size limit for trading gold bars from $20,000 to $2,000.

Advertisement

— China, the world’s third biggest consumer of gold, consumed between 350 tons and 400 tons of gold in 2006 — an increase of about 15% to 20% over 2005.

— While about 80% of China’s gold consumption goes to make jewelry, sales of gold coins, bars, and general bullion in China continue to rise.

It is estimated that only about 1.3% of China’s foreign currency reserves are backed by gold. About 600 tons of gold are reported to be held by China’s central bank. If China does believe the U.S. dollar is headed for trouble, I can only see the central bank increasing its gold reserves.

Any way you look at it, 2007 is shaping up to be another great year for gold bullion. And with many of the major gold producer stocks not having experienced as good of a year in 2006 as the metal itself (whereas gold stocks outperformed the metal in 2005), stocks of quality gold producing companies listed on major stock exchanges may be worth a serious look this year.