Gold is King Among Investors

Gold prices are skyrocketing—recently closing at over $1,000 an ounce, the highest in almost a year—while inflation fears continue rising and the dollar weakens.  This is the news that the media is echoing, quoting several analysts.  Many are blaming President Obama’s stimulus package for amplifying investors’ fears that his spending plan will only push the country deeper into recession.

Analysts’ forecasts, nonetheless, are a mixed bag.  Some analysts are calling the gold rush a bubble that can burst, as the dot-com and housing bubbles did, while others believe it can continue upward.

“Currencies are losing value and holders of currencies are losing confidence.  Gold may break through $1,000 and not look back,” says Ron Goodis, retail trading director at Equidex Brokerage Group Inc. in Closter, New Jersey, according to Bloomberg.  Read Gold Tops $1,000, Highest Since March, as Global Equities Slide

On the other hand, Przemyslaw Radomski, editor of Sunshine Profits, warns that Precious Metals and Corresponding Stocks may Fall in a Few Days.

“Since my previous essay on market timing was posted [Feb. 11], gold gained over $100 and silver gained over $2. These levels are substantially higher than when I suggested getting back on the long side of the precious metals market.  This rally has taken gold almost $200 higher within one month, so it is natural for one to expect at least a modest pullback from here,” Radomski said.

But as everything in economics, gold prices in a free market follow the forces of supply and demand.

“In a free market, increasing demand and rising prices provide a significant incentive for producers to increase the supply of an item.  And that’s usually how it works.  But that’s not what is happening in the gold market.  Demand is certainly increasing.  According to the United States Geological Survey, the demand for gold reached 1,133 tons in 2008, an 18% increase from the previous year.  In dollar terms, this represented a 51% increase to an all-time record $31.8 billion, “writes Jon Herring in his article Peak Oil… What About Peak Gold?

Meanwhile, the global supply is limited.  The industry has only discovered one significant deposit in the last 15 years: that of Aurelian Resources—now owned by Kinross Gold Corporation (NYSE:KGC, TSX:K)—with its Fruta del Norte gold-silver discovery in the Cordillera del Condor, in Ecuador, also known as the “gold dinosaur.”  If investors deem gold to be king in this environment, then Ecuador may provide them with their T. Rex.

Skyrocketing gold prices have also ignited the stock values of the four largest gold producers at the time of today’s 4:00 p.m. close.  Newmont Mining Corporation (NYSE:NEM) gained 7.21%, Anglo Gold Ashanti Ltd. (NYSE:AU) was up 6.36%, Barrick Gold Corporation (NYSE:ABX) earned 1.23%, and Gold Fields Ltd. (NYSE:GFI), up 4.46%.

Another factor that can influence gold prices is that most new worldwide discoveries are made by junior exploration companies—those with funded through equity financing, sometimes with less than $50 million—that combined have poured $12.6 billion into global exploration activities in 2008, according to the Metals Economic Group.  42% of this investment was focused on gold discoveries.