While many in the financial media are still calling for gold’s demise, investors need to understand that gold is still greatly undervalued.
In truth, a gold price of $1,100 an ounce is really not that significant. Although gold is at $1,100 an ounce right now, in 1980 dollars, that’s only a $425 value. If the price of gold reached the 1980 high ($850), the inflation-adjusted price would be over $2000.
So in real terms, gold is just beginning its ascent — and it represents incredible value. And that’s what gets me excited!
This is why more and more people are taking positions in the physical metal, many for the first time in their investing lives.
The old pattern from 2001 to 2005, when gold first started its bull market, showed the yellow metal reaching for a new high and then correcting back for long periods of time before reaching for yet another new high. And ever since gold has crossed the $500 level that old pattern has been broken.
Many are still expecting gold to see a big correction as was seen during the 2001 to 2005 pattern. My take is that we have a new pattern now that will propel gold to $1,500 an ounce before the end of 2010 and to much higher levels in the years to come.
What has changed since gold has crossed the critical $500 level causing this new pattern is several-fold.
First, central banks have become net buyers of gold instead of net sellers. Central banks of the world control close to 19% of the total available above ground supply. Taking away the selling slant on this much metal has had a profound effect on the spot price. Central banks are becoming keenly aware of the problems with the dollar and are seeking gold as a hedge against currency risk. As time goes on, I see more and more central banks jumping on this bandwagon.
Second, the new pattern in gold suggests that funds and retail buying has marching orders to buy on dips. Anytime we do see a correction in the gold price, it is very short-lived as massive physical buying comes in and takes the spot prices back up.
Since gold has crossed the $500 level, we’ve consistently hit new highs multiple times within a very short period. This is quite different from the 2001 to 2005 period where gold would hit a new high once every 12 months or so.
I fully expect this new trend in gold to continue and would not hesitate to tell investors to view the current gold price as a screaming value.
The problems with the U.S. dollar will only get worse with time. And while there are many other extremely bullish factors that will contribute to a higher gold price, the unsustainable debt picture of the U.S. government promises to reward those who take positions in gold, silver, and the precious metals in general for a long time to come.
With the current financial and geopolitical situations we see unfolding in the world at large, I cannot imagine a better or more bullish scenario for gold moving forward.
Don’t worry so much about the short-term, day-to-day, week-to-week movements. Take a position in the physical metals and quality junior gold mining stocks that you can sleep with and let the long-term trend work for you.
It will be in place for a long time to come.
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Editor, Wealth Daily
Investment Director, Mining Speculator and Greg McCoach’s Insider Alert