Gold Will Regain Its Shine

02/02/2011 11:13 am EST


Eric Roseman

Editor, The Commodity Trend Alert

The recent slide presents latecomers to the bull market with a buying opportunity, writes Eric Roseman, editor of Commodity Trend Alert.

The Philadelphia Stock Exchange Gold & Silver Index (Philadelphia: XAU) was down 12% last month. That’s the worst single month we’ve suffered since January 2010. Within a few weeks of that nosedive, the gold market found its bottom and didn’t look back. I think it’s the same story this year.

There are so many reasons why I’m still bullish. Among them is the Federal Reserve, a real screwball of an institution whose primary consequence is to debase your purchasing power year after year. Since the Fed’s bond purchases began in late 2008, the dollar has been on a long-term path of debt accumulation and a near-zero interest rate environment that’s super-bullish for gold and silver. It will stay this way for a while.

Obviously, the Fed is worried enough about deflation and high unemployment that it’s started another bond purchase program. It might lose the war on growing inflation, if the economy doesn’t sustain a prolonged expansion.

Either way, I’m a firm believer in gold and you should be, too.

According to gold bug Thomas Kaplan of Tigris Financial Group, gold represents a mere 0.6% of total global financial assets (stocks, bonds, cash). This is near an all-time low (0.3%) reached in 2001 and significantly below the 3% it accounted for in 1980 and the 4.8% it was in 1968.

Another study, courtesy of International Strategy and Investment Group (ISI), suggests that if gold ownership rose from 0.6% of total financial assets to only 1.2%–still less than half its 1980s level—this would equate to an additional 26,000 tons, or 16% of aggregate gold worldwide. This represents ten years’ worth of current production.

With numbers like these I don’t have to convince you about gold or silver. The best-managed gold mining companies still don’t trade at levels that suggest gold is fairly priced at $1,350 an ounce. The markets still haven’t accorded fair value to big gold miners like Barrick Gold (NYSE: ABX), Goldcorp (NYSE: GG ) and AngloGold Ashanti (NYSE: AU). And don’t forget about the juniors–smashed last month. CMP Gold Trust (Toronto: CMP.UN) now trades at a huge 33% discount to net asset value and the Market Vectors Junior Gold Miners ETF (NYSEArca: GDXJ) is down 19% from its December peak.

I strongly advise you to continue accumulating such gold plays at these sharply lower prices, especially if you just came aboard over the last six months. Buy, buy, buy!

[Two months ago, Roseman correctly anticipated a correction that would begin days later. Curtis Hesler saw it coming as well, and recommended a physical gold fund as well as shares of a major gold producer on a pullback—Editor.]

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