The Glitter is Not Fading

11/26/2007 12:00 am EST

Focus: COMMODITIES

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

Nicholas Vardy, editor of The Global Guru, says that when global markets and economies face uncertainty, there's one market that shines brightly.

Investors turn to gold when the stock and bond markets are wracked with uncertainty. Everything that is bearish for stocks-political instability, inflationary fears, and a falling dollar-tends to be bullish for the yellow metal. No wonder gold breached the $800 an ounce level for the first time since 1980 last month. The Amex Gold Bugs Index-a basket of gold producers' stocks-has risen more than ten fold since 2001 and has doubled in the last three years alone.

You may have heard of the idea of "peak oil"-the point at which the world will produce as much petroleum as it's ever going to. The same may be the case with gold. The world's gold miners simply cannot find enough ore to replace the globe's fast-depleting reserves. And like oil, much of the world's gold reserves are locked up in countries not on your list of places to take your next vacation.

At the same time production is peaking, demand for gold is exploding. According to the World Gold Council, demand for gold rose 19% in the third quarter to hit a record $20.7 billion. Demand for gold by exchange traded funds (ETFs) and similar financial products jumped a whopping seven fold from 19 tons to 138 tons as investors turned to gold as a safe haven.

Then there is the new demand from the world's emerging economies. India already accounts for 22% of the world's gold demand. In China, demand jumped by 25% compared to the same period last year. Pundits expect more demand for gold coming from Asian central banks, as they swap depreciating US Treasuries for gold reserves. Today, one out of five billion ounces of already-mined gold is stashed in central bank vaults.

Gold bulls also believe that the Fed reducing rates in an inflationary environment, combined with continued weakness in the US dollar, all bode well for gold. Although most analysts are predicting a pullback from gold's current levels, market guru Marc Faber is predicting a gold price of $1,000 an ounce within the next few months. That's good news for investors in gold mining stocks. Gold bugs feel that we are in the very early phases of a prolonged bull market. They point out that gold would have to trade at close to $2,500 an ounce to equal the 1980 record in inflation-adjusted terms.

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