Gold breaks through $1000, and could be headed even higher.
It was surreal.
Throughout the financial media, commentators and analysts appeared at a loss for words last week to identify potential catalysts for the abrupt surge in gold and silver prices. As of writing, gold now fetches bang on $1000 an ounce.
The equity markets felt calm, the dollar's value against foreign currencies was not tanking, and the bond markets offered no clue. Gold was the hot topic of the day, but insightful discussion remained remarkably absent.
Gold had been primed for a technical breakout. However, a long list of fundamental drivers supporting higher gold and silver prices leads this Fool to conclude that gold above $1000 will have some legs.
In no particular order, here are some of the more recent fundamental catalysts I've identified:
- China will purchase up to $50 billion in Special Drawing Rights (SDRs) from the International Monetary Fund. China has explicitly called for replacing the US dollar as the world's reserve currency in favour of these SDRs. Russia and India have likewise indicated an interest purchasing SDR-denominated IMF bonds.
- China's ramped up deal-making activity for resource-related assets around the globe reflects an official policy directive. Recent loans or investments by Chinese entities relating to foreign resource assets are themselves nearing the $50 billion mark. China has indicated that foreign reserves will be deployed in support of this broader initiative, representing another clear diversification away from U.S. dollar exposure.
- The Democratic Party of Japan emerged as the clear victor in their recent election, ending a 15-year reign of the Liberal Democratic Party. Fools may recall that the Democratic Party of Japan's finance chief advised his nation last May to cease purchasing U.S. Treasury bonds unless those bonds are denominated in yen.
- China is considering a ban on rare-metal exports. More than 95% of the world's supply of rare-earth minerals comes from China, so the move places global manufacturers of everything from hybrid cars to cell phones in a difficult position. China is also the world’s leading producer of gold, and this move raises this Fool's eyebrow as a precedent for China's restricting exports of key strategic resources.
- China is actively encouraging its 1.3 billion citizens to invest in precious metals. I have viewed excerpts from state television touting the extraordinary relative value of silver to gold given the large deviation from the historical ratio between prices of the two metals. Because gold and silver are surprisingly small physical markets, even a minor uptick in investment demand could fuel sizeable price increases.
- Hong Kong is repatriating its physical gold reserves from London to high-security vaults at home, and it is inviting the region's central banks to store their bullion there. Announced just this week, the move deals a significant blow to London's historical role as a global hub in the precious metals market, and it raises the spectre of a potential price-settlement hub in Asia to rival the New York and London daily spot-price fixes. The Hong Kong Monetary Authority is also targeting a new gold bullion ETF using the new vault as a repository, which would remove yet more physical supply from the market.
It's no coincidence that all of the above developments -- which can be considered potential near-term catalysts boosting the strength of this breakout in gold and silver -- hail from Asia.
This Fool has observed China, which holds more dollar-denominated debt than any other nation, steadily ramping up both its rhetoric and its actions in a clear vote of no confidence in the greenback. I view an end to this 18-month correction in precious metals as imminent, and I concur with the likes of Jim Rogers that the dollar remains between a rock and a hard place.
Where to invest
If you lend credence to these fundamental factors supporting a continuation of the eight year bull market in precious metals, then you'll want at least some investment exposure to gold or silver.
The dollar denominated SPDR Gold Trust (NYSE: GLD) largely tracks the price of bullion. Other US-listed companies worth considering are large-cap Goldcorp (NYSE: GG) and smaller companies like Yamana Gold (NYSE: AUY) and Golden Star Resources (AMEX: GSS). Here in the UK, Medusa Mining (LSE: MML) might be one to take a look at.
For silver, listed in the US are Silver Wheaton (NYSE: SLW) has an attractive low-cost business model, and Coeur d'Alene Mines (NYSE: CDE) is enjoying quite a resurgence as two huge mines rake in the cash flow. In the UK, Fesnillo (LSE: FRES) is the largest of the quoted pure silver miners.
There are risks involved in buying mining companies, especially those at the smaller end of the market. As ever, do your own homework and make sure you understand what could go wrong.
More on the economy and the markets:
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> A version of this article was originally published on Fool.com. It has been updated by Bruce Jackson, who doesn't have an interest in any of the companies mentioned in this article.
