Matt Badiali has a new promo out for his S&A Resource Report, and it’s all built on the eventual resurgence of gold.
He teases a few stocks for us, and we’ll get to identifying them in a moment — but first, he goes through the long rationale for gold’s rise over the next five years … and it’s almost entirely based on China.
Chinese gold demand is obvious and often discussed, even though much of it is not terribly transparent — China is the biggest producer of gold in the world, and all gold produced in China has to be sold (at market price) to the government for domestic use and/or addition to their gold reserves, and it’s also usually the largest importer of gold these days (supplanting India), and the Chinese sovereign wealth funds and state-controlled enterprises are heavy investors in gold mining companies around the world.
So we all know that China is big on gold, with the general assumption being that their buildup of gold reserves is both a way to reduce risks from a declining US dollar and Euro (they hold major reserves of both, thanks to their trade surplus), and as a way to “internationalize” the Yuan Renminbi (which remains a highly controlled and almost closed currency, though that’s changing slowly)… though the fact that they don’t often report about their gold reserves, as other countries do, makes everyone wonder just where that gold is going and what they’re doing with it.
That world of mystery and intrigue takes up the first three quarters of the ad spiel, and it’s reasonably compelling if you want to check it out here — I don’t have the patience to excerpt the whole argument, but here’s a little bit of the pitch to give you a taste of Badiali’s thoughts:
“Something is amiss in the gold market. You may have noticed the telltale signs – the confusing news stories, the weird price moves that don’t make any sense. But no one is telling you the whole story.
“The truth is that gold is disappearing.
“It started very gradually about 10 years ago – and it was hard to see at first. So a lot of people didn’t notice.
“Now it’s undeniable: Gold is vanishing….
“The world’s gold supply is literally disappearing…
“And consumer demand from investors hit an all-time high in 2013.
“Put these two undeniable facts together, and there is only one possible conclusion: The price of gold is going to rise… and rapidly.
“But you may be surprised by exactly how high experts are predicting the price of gold to go.
“[James] Rickards isn’t just predicting that gold will double or triple in the next decade.
“He estimates that gold will skyrocket to $9,000 an ounce or more within the next five years – a 600% increase over current prices.”
That “disappearing” is basically the fact that gold is being Hoovered up by China, and probably largely going into the equivalent of their Fort Knox. And there’s a lot of expectation that the next time China releases numbers about their official gold reserves they could be more than three times larger than the last report in 2009, putting them in the big leagues among global powers when it comes to gold reserves … and that China’s diversification away from the dollar might free the dollar up to move lower if China shrinks their hoard of US Treasury Bonds and stops worrying about the value of those bonds.
Of course, that same basic story about China, their tight connection to the dollar (both because we’re a huge customer of China’s, and because they hold so many dollars), and the increases in their gold reserves, has held true for most of the last five or six years… during which gold has certainly not been moving uniformly up, so in the end this is a long-term argument about gold being much higher in five or ten years, not really about gold jumping dramatically higher this year just because of the China “story.” There’s another interesting piece here from about six months ago about the increasing gold reserves in China too if you’d like another perspective.
So if you buy that argument that gold will rise strongly against the dollar again, and in dramatic fashion over the long term, what do you buy?
Badiali hedges his bet somewhat — if you are convinced that gold is going to skyrocket, then the biggest winners will be the producers and explorers that are dirt cheap now because they have very high costs or big, expensive mines to