Investing in the 21st Century
The Next Gold Rush
August 30, 2006
Investigating the factors behind this year’s frenzied rush for gold, and analyzing the health and future of the gold industry.
Gold has long been associated with wealth and power, but now lays claim to another valuable attribute. Gold has become a safe haven for investors as geopolitical tensions and inflation fears increase demand for the precious metal. A new wave of Exchange Traded Funds (ETF’s) is also making it easier than ever for ordinary consumers to buy into a gold rush.
Gold is revered for its unique physical properties including industrial uses in electronics and dentistry. Gold can benefit electronic components due to its excellent conductivity of heat and electricity. It also has uses in jewelry, and Asian demand continues to remain sky high for the bright metal. Further demand pressure comes from events like the Olympics, which used pure gold metals until 1912, after which six grams of gold was used. The Nobel Prize also is made out of gold.
These demand factors alone contribute significantly to the value of the metal. Gold is a prized possession not only among consumers, but also investors. When the US Dollar struggles as a currency, investors like to buy gold to protect their portfolios. Gold is a better store of value since it is backed by the actual metal rather than government assurances. International events like Iran’s recent nuclear enrichment program often force traders to flee to the safe haven.
Gold hit a record high of $850 an ounce on January 21, 1980. It subsequently fell to a record low of $252.90 per ounce on June 21, 1999. A sharp run up to over $700 occurred in the first half of 2006, only to let the air out of the balloon as traders shed speculative positions and fundamentals kicked in.
Part of the reason for this rise was the introduction of several ETF’s that allowed investors to easily include gold in their portfolios. An ETF trades like normal stocks and tries to replicate a stock index or commodity, without requiring you to own the individual pieces. Among these are Streettracks Gold (GLD) and the iShares COMEX Gold Trust (IAU). Each of these ETF shares represents ownership of 1/10th an ounce of physical gold.
It costs gold companies an average of $238 per troy ounce to mine and extract gold. This is a fixed cost that usually does not fluctuate much despite volatile gold selling prices. Gold is currently trading at $626.10 per ounce, resulting in large profits for mining companies. Certain companies including Goldcorp (GG) and Glamis Gold (GLG) are believed to have production costs of under $200 an ounce, giving them strong positioning within the industry.