Gold's Bullish Comeback In 2007: 6 Ways To Tap Into the "Second Leg" of Mega Profits
An Investment U White Paper Report
by the Investment U Research Team The 21st century gold rush began in 2001, when one ounce sold for $280. It proceeded to climb 159% to its 25-year high of $725 in May 2006. The subsequent selloff in commodities brought the precious metal back down to the $600 level, but there is plenty of upside left… Several of the world's foremost gold experts are calling the pullback a mere correction, and say that the metal should continue to make all-time highs… - According to Jim Rogers, the "Adventure Capitalist" and author of Hot Commodities, "The shortest bull market for commodities lasted 15 years, the longest 23 years, so if history is any guide, they've got a long way to go. This is not a bubble."
- The winner of the London Bullion Market Association's 2006 gold price forecasts, TheBullionDesk.com, reports the price of gold could hit $850/oz in 2007. That's a 40% move from today's mark of $610. "We are predicting an average price of $700/oz with a spike to $850/oz."
- Jon Nadler, investment products analyst for Kitco, comments, "Gold prices actually started their life at $35 per ounce in the early 1970s. From there, it went to $850-$875 - a twenty-five-times-over move. Gold began its latest move up at $252, so prices at $6,250 can't be ruled out either, in terms of magnitude."
Of course, knowing who is riding the gold wagon isn't reason enough to invest. Instead, our gold forecast looks at why they believe prices could advance. In a word, it's demand. And here's what's driving it higher, in what could be the "second leg" of golden profits. Plus, six gold funds worth considering… Gold's Reaction to Consumer Prices By far, the most consistent factor determining the price of gold has been inflation. As inflation goes up, the demand for - and price of - gold moves with it. Since the end of World War II, the five years in which U.S. inflation was at its highest were 1946, 1974, 1975, 1979, and 1980. During those five years, the average real return on stocks, as measured by the Dow, was -12.33%; the average real return on gold was 130.4%. Back in 1979, short-term interest rates were 8%, but inflation was 13%. That means cash returned a "real" -5% a year. Gold went from $100 to $800 in no time. At the end of the 1970s, Fed Chairman Paul Volker drove short-term interest rates through the roof. By 1981, they were 15%, and inflation fell back into the single digits, handing investors positive "real" returns. As a result, gold tanked to $300 by 1982. To be sure, inflation remains a key factor in the price of gold - perhaps the biggest. But surging worldwide economic growth is becoming a major factor, as well… Safety In Nuggets "In the middle of every difficulty lies opportunity."
~ Albert Einstein Gold is one of the few investments that has survived - and even thrived - during times of economic uncertainty… In the slump following the "Wall Street Crash," from September 1929 to April 1932, the Dow Jones Industrials slid from 382 to 56 - an 85% loss - and some 4,000 U.S. banks closed their doors. Meanwhile, the official price of gold actually remained unchanged. Gold increased in value during the events following "Black Monday," October 19, 1987, when the Morgan Stanley index of world shares fell 19% over 10 days. When the world is under some sort of cataclysmic threat, investors will flock back to gold because of its intrinsic value. The dollar, on the other hand, is nothing but a promise of repayment from the U.S. government. |
China Banks to Start Selling Gold Bullion Much of the explosion in demand for gold will likely come from retail investors in India, China, and West Asia - countries that are developing an appetite for the yellow metal as an investment, not just for the manufacturing of fine goods. Jewelry accounts for 69% of gold's global demand, but investment demand from these countries has risen 34%, 32% and 20% respectively in 2005. In the second quarter of 2006 alone, investment demand went up 19%. Chinese investors in particular will provide a major thrust in the near future… In China, home to 1.3 billion people and the fastest-growing economy in modern history, private gold ownership had been outlawed for generations. But in 2002, the Shanghai Gold Exchange opened and started free trade in gold for the first time in that nation's history. And the country recently passed legislation that will allow its four major commercial banks to sell gold bars to their customers. The Bank of China is getting in on the action, too… The country's biggest foreign currency lender has begun allowing investors to buy and sell gold using their U.S. dollar accounts. It's estimated that $36 billion of these funds could move into gold in the coming years. Plus, the Chinese government is moving to increase its gold reserves. If these predictions come to pass, China alone could consume 40% of the world's entire gold production. India's Buying Gold, Too… India is now the world's biggest gold-consuming nation. Its share of global gold demand is about 1.5 times that of the United States, though its GDP is only one-twentieth the size of the U.S. GDP. With its high rate of gold consumption, India accounts for 18% of the annual global gold demand, while its share of global GDP on nominal dollar GDP is only 1.6%. The country is experiencing an 80% growth in gold investment following a loosening of trade and market restrictions. India's gold consumption rose 57% from a year earlier in the 12 months ended March 31, 2006, on top of a 63% jump in the previous year. Expect this trend to continue. The Best Ways To Invest In Gold Buying bullion or certificates of ownership are the most direct ways to own this precious metal. They guarantee that your investment is 100% correlated to the spot price of gold. (To find out how to purchase gold bullion through the Perth Mint Certificate Program, read Part 2 of this 2007 Gold Forecast.) Another way to take part in the price action of gold is through Exchange-Traded Funds. More and more ETFs are hitting the market, giving individual investors plenty of options to profit from gold. The World Gold Council reported that $789 million flowed into gold ETFs in the second quarter of 2006 alone, contributing to the $10 billion total. Two of the most popular gold ETFs offer something no other investment tool does: each share represents one-tenth of an ounce of gold and moves up or down solely on the price of gold. The streetTRACKS Gold Trust (NYSE: GLD): Shares of the Gold Trust, the first gold ETF established by the World Gold Council and backed by State Street, hit Wall Street in November 2004. Investors, many of them first-timers, purchased 30 million shares in the first three days. They snatched up close to 500 tons of gold in approximately 18 months - and 109 tons in the first quarter of 2006. The iShares COMEX Gold Trust (AMEX: IAU): In February 2005, Barclays Global Investors launched the second gold ETF. After two days, Barclays held 35,000 ounces of gold in trust for shareholders. Other ETF options are broad commodity plays, with a touch of gold. The PowerShares DB Commodity Index Tracking Fund (AMEX: DBC) invests in futures contracts to track a Deutsche Bank index, with base weights of 35% crude oil, 20% heating oil, 12.5% aluminum, 10% gold and 11.25% each in corn and wheat.
The iShares Commodity Index Trust (NYSE: GSG) tracks a Goldman Sachs index that holds 24 types of commodities. The Goldman Sachs Commodity Index, or GSCI, contains six energy products, five industrial metals, eight agricultural products, three livestock products and two precious metals (yes, one is gold). And if news coming out of India is true - that the world's largest consumer of gold has been given the green light for launching some gold ETFs of its own - we could soon witness the ultimate growing spurt. Two Gold Funds With A Twist Gold/Commodity ETFs | | | | Fund Name | Ticker | Recent Price | streetTRACKS Gold Shares | (NYSE: GLD) | $64.20 | iShares COMEX Gold Trust | (AMEX: IAU) | $64.20 | Powershares DB Commodity Index Fund | (AMEX: DBC) | $23.47 | iShares GSCI Commodity Index Trust | (NYSE: GSG) | $37.71 |
Here are a couple unique funds - one that's a little riskier, but capable of outperforming metals; the other is a safer, but equally unique, option. If you like the idea of owning a mutual fund to get your shares of gold, but want a turbo-charged option, ProFunds could be your answer. The Precious Metals UltraSector ProFund (PMPIX) provides leveraged exposure to the Dow Jones Precious Metals Index. The fund is designed to produce daily returns 1.5 times the performance of its index. This means that on a day when the DJ Precious Metals Index goes up by 1%, the value of the PMPIX should increase by 1.5%. Likewise, on a day when the index declines by 1%, the fund should decrease by 1.5%. The Dow Jones Precious Metals Index measures the performance of the precious metals mining industry. Component companies include leading miners and producers of gold, silver and platinum-group metals. Another fund that could perform well in 2007 is the Prudent Global Income Fund (PSAFX). It's a no-load mutual fund structured to benefit from a falling dollar and rising gold prices, with a significant portion of assets invested in foreign government securities. Prudent Global invests in bullion, dividend-paying stocks and gold mining companies, focused primarily on those already mining gold (senior producers) as opposed to exploration or "junior companies." As long as the dollar falls and gold rises, it will be a steady performer in your portfolio. Of course, in a properly diversified portfolio, only 5% of the holdings are in precious metals or precious metals stocks. The other 95% of your positions should be divided among U.S. and international stocks, Real Estate Investment Trusts (REITS), high-yield and high-grade bonds, and inflation-protected Treasuries. This is the same blend of securities that has launched The Oxford Club (Invesmtent U's parent organization) to the #3 investment advisory in the nation. The Hulber Financial Digest recently ranked the Club third overall for five-year, risk adjusted return. The Club's "market-proof" Asset Allocation Model is based on the investment formula that won Dr. Harold Markowitz the Nobel Prize in finance in 1990. His paper promising "portfolio optimization through means variance analysis" demonstrates how you can maximize your profits and minimize your risk by properly asset allocating and rebalancing your portfolio. Get all of the Club's recommendations, from growth stocks to high-quality income plays and top-rated bond and precious metals positions, here's how to join. Good investing, The Investment U Research Team Related ArticlesView the complete Gold Forecast 2007 white paper in .PDF format Copyright 2007 - 2008, Investment U, 105 W. Monument St., Baltimore, MD 21201 All rights reserved. No part of this report may be reproduced or placed on any electronic medium without written permission from the publisher. Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. | 
