Gold - getting started already missed?
The gold price has more than quadrupled since its low in 1999 at 250 USD per ounce. The profits over of gold mines over the past 10 years could have significantly increased your market capitalization. Many investors therefore have a not unreasonable question: Is the Gold Bull already over, or should I still on board - and if I will go, which segment is still worth it?
Gold supply can't keep up with demand
Despite the gold price increase since the year 2000 the world production is declining. In particular the mines in South Africa – the largest gold producer in the world just a few years ago – are having to contend with significant problems such as falling yields, mine accidents, AIDS and rapidly increasing costs. Even under ideal conditions the global gold supply from new prospects in the coming years will only maintain the maximum at the current level of approximately 2,500 tonnes per year. In the coming years, the demand for gold will continue to increase. In a climate of massive uncertainty on the financial markets, exorbitant monetary escalations and medium-term inflation, investors will be increasingly reaching for the tangible commodity of gold. Investors worldwide are still massively underinvested in gold. In recent times such as in 1934 or 1982, physical gold assets accounted of approximately 21% and 26% of the global financial markets. Currently the global rate is at approximately 1.9% despite the worst crisis since the 1930s! Are we speaking about a real gold and commodity bubble, or is this just the attempt to leave the masses in the dark for as long as possible?
Keep in mind that all the gold ever refined throughout the history of mankind would result only in a 20m cube, or 4.8 billion ounces. With 6.8 Billion people in the world, this means not even one ounce per person!
Against this background it is not surprising that the legendary George Soros – founder of the Quantum Hedge Funds and one of the richest men in the world – warned of “the ultimate Gold Bubble” at the World Economic Forum in Davos, whilst simultaneously increasing his gold holdings by 8.8 billion US dollar (+ 40%), and a few weeks later topping up with another 75 million USD in one of the largest Canadian junior miners.
Last but not least the central banks worldwide have recently in the last year, for the first time since 1977, become net buyers of gold, instead of net gold sellers. The central banks have for the last 25 years been on the vendor side and have kept the price of gold artificially low. The change to the role of gold buyers should strongly support the gold price over the coming years.
Highly undervalued gold mines
How can you benefit now as an investor from rising gold prices? Besides physical gold, which every investor should have for asset protection reasons alone, gold mines currently offer the "better" gold investment opportunity. Whilst the price of gold could rise from one peak to the next in recent years, many mining stocks are still on the same level as in 2006 when the price of gold was at 725 USD per ounce.
The main reason is that the market for gold mining is a relatively small segment on the international market. So the market capitalization of all gold mines worldwide is under 200 billion USD. In comparison, new investments amounting to over 5,000 USD billion were issued last year alone. This also explains why gold mines lost value during the global financial crisis of 2008. Notably hedge funds which had suffered massive losses with defaulted shares had to sell their gold to provide the necessary liquidity. This caused a massive sale in the gold mines, even though the gold price was rising during this period, from which they still haven’t fully recovered, despite the massive recovery in the last year. The massive undervaluation of gold miners compared to the price of gold will very probably correct itself in the coming months.
Within the gold mining sector we focus on prospective producers as well potential takeover targets. Major gold producers consume resources every day and have to try to replenish their underground gold reserves. Typically this is done by acquisitions of junior producers, which have recently gone into production and have the potential to produce at least 100,000 ounces of gold per annum. There are also new gold discoveries with the potential of 3 to 5 million ounces of gold which are of strong interest to the large gold miners. These companies would be acquired with significant premiums and they will be the big winners in the upcoming bull market. The increased number of acquisitions in the last year will continue to grow significantly in the coming years. Benefit from this trend and improving your opportunity risk ratio significantly.