Submitted by Randall Radic as part of our contributors program.
Price of Gold Set to Soar
The price of gold has risen for more than a decade. It topped out at $1920 in the fall of 2011. Ever since then it has hovered between $1500 and $1600. At the present juncture, a number of factors appear ready to converge. When they do, the price of gold will soar.
The first factor is negative interest rates. Throughout history, whenever interest rates fall below the rate of inflation, people start to think about precious metals as an alternative. For example, during the 1970s – a period of high-inflation – interest rates were below the inflation rate more than half the time. During the last half decade, interest rates have been near zero. And while inflation rates during that timeframe have not been inordinate, they have not been zero.
The second factor is Europe’s proposed new rescue plan – the Eurozone Stability Mechanism (ESM) – which has enough money on hand to handle the Greek economic crisis, but not enough to handle what’s coming, and coming very soon: the financial collapse of Spain, Italy and France. The means the European Central Bank will print and print and print money. It will take many trillions of euros to bail out the aforementioned countries.
Printing money tends to crowd out the free market. When that occurs, the price of gold goes up.
The third factor is The Bank for International Settlements is discussing the idea of reclassifying gold from a Tier 3 asset to a Tier 1 asset. This would mean gold would be valued at 100% rather than at the 50% imposed by the third tier. If that happens and gold can be used as Tier 1 capital, the commercial banks and even the central banks would want to hold substantial amounts of physical bullion.
If the banks decide to hold more gold, the price will inevitably go up.
All of the above factors engender fear. And when investors get scared, markets and stock prices do funny things. One thing that happens is that gold goes up, up, up. So now is a good time to invest in gold mining companies, either the major producers, such as Freeport-McMoRan (FCX), Barrick Gold (ABX), Newmont Mining (NEM), Kinross Gold (KGC), Goldcorp (GG) and Rio Tinto. Most of these appear to be undervalued at the present moment. In fact, Kinross is up 1.3% at midday, to $7.87. It is the most actively traded on the TSX, with more than 5 million shares changing hands.
Some of the juniors look like pretty good plays too. Gold Standard Ventures Corp. (GSV) just raised $20 million by selling shares at $2. Another junior well-situated is Continental Resources Group Inc. (CRGC), trading at $0.22 per share. One of the more attractive of the juniors is Pershing Gold Corp. (PGLC), in which Coeur d’Alene Mines Corp. (CDM) is heavily invested. Pershing is set to enter production by the end of 2013, and expects to produce 50,000 ounces of gold in 2014.
If the triumvirate of factors noted above does indeed converge, gold will soar. The current historical-political environment appears to be favoring gold and those that invest in it.