Gold Price Holding up Extremely Well—the Bandwagon Has Further to Go

Investing in gold is a subject that’s been well endorsed in this publication and the spot market for gold futures has been due for a correction. But, we aren’t getting much of a correction in gold (right now) because global investors feel that investment risk is high enough to justify gold future prices at almost record highs.

The market for gold futures could best be described as being in a period of consolidation around the top. Short-term trading action has been about a flight to cash for obvious reasons. Virtually all commodities have been backing off this week and so has gold. But I don’t see a case for falling gold prices in any sustainable manner. There is a bandwagon out there of institutional investors who have and are continuing to make long-term investments based on the expectation for higher gold prices. I certainly view gold-related investments as one of the few higher growth opportunities for investors. The rest of the economy just isn’t growing that fast.

Giving gold advice is a fool’s game, because nobody can predict the future. It seems reasonable to expect, however, higher inflation down the road (do prices for things ever go down?) It also seems reasonable to expect both consumer and industrial demand for gold to improve. So, it therefore seems reasonable to me that the current spot price of gold is accurate; therefore, the business model for companies mining the commodity remains excellent.

I think we’re getting close to a decent new entry point for gold stocks. Of course, the big money has already been made. You can’t have a run-up in gold prices this strong without fortunes having already been created. That’s what the buy-low/sell-high investment strategy is all about. You get into the right asset when nobody’s interested and you wait to see if things turn out.

Going forward, the one commodity that stands out as being in the doldrums right now is natural gas. Here is an opportunity that’s ripe for more economic analysis. But getting back to gold, we all know that a lot of gold stocks have had a great run. What’s coming is consolidation among existing producers within the group. It’s already been happening, mostly for producers of other precious metals.

There’s a real incentive for profitable gold miners to consolidate. It’s tough to find new discoveries and purchasing existing production tends to lower costs per ounce. I think we’re going to see a lot of mergers and acquisitions among the mid-tier producers this year and the potential for this should be on the equity speculator’s mind.