Updated from Friday, Feb. 20
Interest in gold is soaring, as jittery and scandal-weary investors flock to the precious metal . And it could be headed much higher, according to one at least one gold bug.
Gold futures for April delivery closed at $1,002 an ounce Friday, trading over $1,000 for the first time in almost a year. Meanwhile, State Street Global Markets on Monday said assets in the
SPDR Gold Shares
have surpassed $30 billion, making it the second largest exchange-traded fund by assets in the world.
Henry Smyth, director of the
Granville Cooper Gold Funds
, says his charts suggest the precious metal, which is trading at $990.40 recently on the New York Mercantile Exchange, will reach an eye-popping $3,500 within two years. Dollar demand for gold went to $102 billion, an increase of 29% over last year, according to the World Gold Council's report released Feb. 18.
"It used to be people would ask why I was in gold," Smyth says. "Now they ask, 'How high will it go?' But the question they should be asking is, 'What will stop it?'"
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He points out that investment vehicles are driving the demand. The World Gold Council reports that net retail investment rose 396% from 61 tonnes in the fourth quarter of 2007 to 304 tonnes in the same quarter for 2008.
SPDR Gold Shares saw its gold holdings jump 200 tonnes in the last month, according the fund data.
Smyth says another reason for gold's rise is that the absence of positive real interest rates. "The last brake on gold was when interest rates went up," he says. Interest rates are not expected to rise until after the economic crisis lifts, which does not appear to be any time soon.
"This is a secular bull run that will take time to complete," says Smyth.
While many attribute investors' move to gold as a flight to safety, Smyth disagrees. Instead he sees this as a shift on asset allocation.
"It used to be everyone had some gold in their portfolio, but when gold dropped in value, it also got dropped from portfolios," he says. He says advisors are returning to the opinion that all portfolios should have some exposure to gold, also causing the increase in demand.
Adding to the increase is the devaluations of currencies around the globe.
"Foreign investors, like Americans, are nervous about their banking systems and buying gold ETFs in their own currency," Smyth says. "You can even get a redemption in gold."
Banks are joining the game as well. Private banks like
have begun creating their own gold ETFs for their clients.
Gold miners are another way for investors to play the bull run.
Freeport McMoran Copper & Gold
shares are up roughly 18% year-to-date.
also delivered a $10 million fourth quarter profit and the stock is up over 4% year-to-date.
The only problem with some gold miners is managing the companies.
reported a 43% increase in gold output even as it struggles with a loss due to an impairment charge. But the company is still trading at roughly $18 a share, a nice recovery off of a year low of $6.85.
Miners are rushing to meet demand for the precious metal by increasing production. The cost to mine gold is roughly below $400 an ounce.
Great Basin Gold
delivered a 23% increase in gold recovery from mineral reserves in 2008 over 2007 according to its own feasibility study.
mining in British Columbia Vancouver reported a 75% increase in January 2009 production over last year's production for the same month.
on Friday reported that its output came in at 2.1 million ounces, which was the strongest production quarter of the year for the mining company.
Australia seems to be the only area where gold production is down, but the reason is that mining companies extracted
amounts of lower gold-bearing ores in response to the higher gold prices. The Australian figures were reported in a survey by Surbiton Associates released on Sunday.
Even the U.S. Mint is getting in on the act. Gold bullion sales increased 166% from 2007 to 2008. Net income for the program skyrocketed 295% bringing in $17 million in net income, according to the US Mint's annual report.
If investors think they have missed the opportunity for gold, there is always silver. The
iShares Silver Trust
has already jumped 29% year-to-date, but still has a way to go to get back to its 52-week high of $20.73.
"I think silver will be the big surprise here," Smyth says. "It's cheap here and I expect it to go up as well."
But for now, there is no sign of this market cooling off. Even the U.S. Mint has had to suspend sale of certain bullion products last year because it didn't have the inventory to meet demand.
Gold is the shining spot in the bear market.