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Gold funds are sucking up bullion like a pack of demon-possessed Hoovers …
• This week, the Central Gold Trust of Canada (GTU) announced it is going to buy $800 million worth of gold. Using recent prices, that’s 648,000 troy ounces or 20.15 metric tonnes.
• Last month, Sprott Physical Gold Trust (PHYS) raised $279 million in a secondary offering, and said it would spend that money on acquiring physical gold bullion. At the time, that was good for 230,000 troy ounces of gold.
• Also last month, the SPDR Gold Trust (GLD) filed papers allowing it to purchase an additional $28 billion in gold over time. To be sure, the GLD won’t be purchasing all that gold at once, and there’s no guarantee it will buy all of it. But at today’s prices, that works out to 22.7 million ounces.
Last year, all the gold produced by the mines in the world totaled just 2,527 metric tonnes, according to GFMS data. So, just the extra purchases by GTU and PHYS will eat up more than 1% of the world’s entire gold production, if it stays the same. And many experts expect gold mine production to go down this year.
Potential purchases by GLD would account for another 706 metric tonnes — or more than one-fourth of all the gold that was mined last year.
And these aren’t the only ETFs in the world that hold physical gold. Here’s a chart from the always excellent Sharelynx.com …
Over the last three months alone, ETFs have added almost 250 metric tonnes to their holdings, for an annualized rate of 1000 tonnes. To put that in perspective, total demand was 3,386 metric tonnes last year.
And this means ETF investment demand is becoming a larger and larger part of total demand …
Considering all the other demand for gold — from other investment funds, physical buyers, jewelry and more — I’d say there’s more than enough evidence we’re shifting into the next phase of gold’s bull market.
There’s Gold in
Them Thar Alps
This week, I talked to Fred Jheon, Managing Director of U.S. Product Development for ETFS Physical Swiss Gold Shares (SGOL). SGOL has also been adding to its bullion holdings. Its total assets under management passed the $500 million mark just last week. And it’s the fastest-growing physical exchange-traded fund (percentage-wise, in terms of ounces held) this year.
SGOL may be becoming more popular because it sets itself apart from two other well-know U.S.-listed gold ETFs, the GLD and the iShares COMEX Gold Trust (IAU), by having its gold housed in Switzerland. Both the GLD and IAU keep their gold in London.
Mr. Jheon said he believes the bullish action in gold is tied to what’s happening with the European debt crisis. He said, “The more issues there are with Greece and neighboring countries and their sovereign debt, the more flows we have coming in to our funds.”
There’s also a broader adoption of gold as an investment class underway, Mr. Jheon says, as people look to move out of paper assets they view as more risky and into a safe haven.
Along with a surge in investment demand, Mr. Jheon offers two other forces driving gold prices: Central banks have switched from being net sellers of gold to net buyers. And then there’s the Chinese …
“China has been one of the largest buyers of gold as of late,” Mr. Jheon says. “Their central bank is replacing foreign currencies with gold holdings.”
Mr. Jheon expects gold to stabilize between the high $1,100s and low $1,200s if news on the global economic cycle continues to improve. But if there is more bad news on the euro zone and sovereign debt, he expects the price of gold could go higher.
I asked Mr. Jheon to finish the sentence: “I would buy gold now because …” His answer: “Because it diversifies my portfolio as well as reduces overall portfolio risk.”
Multiple Forces Are
Driving Gold Higher
Here are some other forces at work that I believe should drive gold prices higher …
- Mining Costs Are Rising. Global total cash costs increasing by an average of 3%, or $14 per ounce in 2009, to $478 per ounce. GFMS has calculated that the “true” long-term cost of gold mine production — including things like exploration, expansion capital costs, project development and more — at somewhere between $925 per ounce and $950 per ounce. You can bet that as mining costs rise, miners will pass along those costs to consumers.
- Free Money. Despite the austerity talk, the European Central Bank is finding plenty of ways to loan various European governments more money. Here in the U.S., President Obama has proposed a $50 billion second stimulus package. Also, St. Louis Fed president James Bullard says the Fed won’t be raising interest rates anytime soon. There’s nothing the gold market likes better than free money.
- Asian Demand Keeps Cranking Up. It’s not just China. Let’s take Vietnam for example. The Vietnamese consume more gold per dollar of income on average than anyone else on earth. Last year, they consumed more than twice as much gold as the famously gold-loving Indians, 10 times as much as Chinese and 44 times as much as Americans, according to World Gold Council data.
So, yes, I believe the big trend in gold is up, and this trend is going to get a whole lot bigger!
What does this all mean for gold mining stocks?
Well, in the past month, gold mining stocks have underperformed gold. Here’s a chart showing the 1-month performance of the SPDR Gold Trust (GLD), which tracks gold closely, the AMEX Gold Bugs Index (HUI) and the S&P 500 (SPX).
You can see the recent sell-off in the broad stock market punished gold stocks as well, and they pulled back. But over other time frames — longer-term time frames — gold stocks can outperform gold, especially in a gold bull market, because they are leveraged to the underlying metal.
So, I think this underperformance in gold mining shares is very temporary. And I think this is a GREAT time to buy gold miners … when they’re relatively cheap.
Could gold pull back here? Sure.
But gold could also go a heck of a lot higher a lot faster than many on Wall Street believe possible. Do yourself a favor and hop aboard this big trend. It could be the ride of your life.
Because with multiple funds lining up to buy bullion, gold at under $1,300 an ounce could be going … going … gone!
Taking the First Step …
If you’re looking for an easy way to trade gold, ETFS Physical Swiss Gold Shares (SGOL) could be a good way to start. It has a slightly lower expense ratio, 0.39%, than the GLD or IAU, which have expense ratios of 0.40%. Of course, expense ratios aren’t the only consideration when you choose a gold fund. You can find out more about the SGOL here: http://www.etfsecurities.com/msl/etfs_physical_gold_us.asp.
And each share of SGOL represents 0.1 ounces of gold in a Swiss vault. You can see a list of SGOL’s audited, numbered gold bars here: http://www.etfsecurities.com/msl/index_us.asp
However, a physical gold fund is just the beginning …
There is so much more you can do with gold to protect your portfolio and potentially profit from the coming surge in prices. And this is a great time to do it.
Yours for trading profits,
Sean
P.S. I recently published a report on gold and silver, “The New Gold Rush — to $2,000 and Beyond.” This report gives you 10 gold and silver recommendations to lock and load for potential profits. Do it today!
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{ 2 comments… read them below or add one }
HI SEAN……WHAT IMPACT WILL THE RECENT GOLD SUPPLIES FM W. AFRICA HAVE ON GOLD PRICES GOING FORWARD?….TNX…….BOB
Don’t gold miner stocks go down when the Dow goes down? When & why do they take off again if the market goes lower? Is it just a direct correlation to the price of gold?
Thank you