In a recent interview with BusinessWeek, Jim Rogers gave his thoughts on everyone's favorite topic: gold... Rogers expects gold to hit $2,000 an ounce "sometime in the next decade." He's not buying at current prices. He thinks gold is currently too popular. But Rogers is "not selling under any circumstances," either.
We may see a short-term correction in gold, but the fundamentals for its bull run are still intact. The market is growing less confident in paper money daily. And it's not just the U.S. dollar. Governments are running huge deficits around the world. As central banks continue printing cash, real interest rates will turn negative... You could easily make the argument we're experiencing negative real rates today. Negative real interest rates are terrible for stocks, but great for gold.
While large institutional investors – like Rogers and Paulson – are bolstering the price of gold, the real gains in gold will come when central banks step up their purchases to diversify their foreign exchange reserves. The total value of the world's gold is around $6 trillion at today's prices, versus about $200 trillion in global financial assets. India already bought 200 metric tonnes in November. Russia, Mauritius, and Sri Lanka also bought gold.
The U.S., the world's largest gold owner, holds 8,133 metric tonnes, around 77% of its total foreign exchange reserves. The Bank of France holds 71% of its reserves. The Bank of Italy, 67%.
Compare that to Asia... China, the world's sixth-largest owner of gold with more than 1,000 metric tonnes, has less than 2% of total reserves in gold (at $1,100 an ounce). Japan holds only 2.7%. India holds 7.5% (including the recent purchase). Russia, 4.9%. Hong Kong holds nearly zero. So what happens when these countries decide to boost their gold reserves? Look at these numbers from Ian McCulley of Grant's Interest Rate Observer. (Also, thanks to Grant's for the numbers on foreign central banks' gold holdings):
If the nine [foreign exchange reserve holders in the world that are currently "underweight" gold] got it into their heads to boost their gold holdings to 10% of their reserves, they would have to acquire 11,174 metric tons, to 25%, they would need 33,254 metric tons.
For perspective, existing official holdings currently sum to 29,634 metric tons, or 20% of the aforementioned 150,000 metric tons of aboveground gold.
In other words, gold will soar.
If you’re looking for leverage to gold, Matt found a great play for his Resource Report readers... Royalty companies.
Back in March, I told my Resource Report readers to buy Royal Gold (RGLD). Royal Gold doesn't have a fleet of geologists and engineers out scouring the hills. It doesn't do the actual mining... All it does is evaluate mining projects and buy royalties.
That means it exchanges cash today for a long-term supply of gold from the mine. Resource Report readers are up 56% on Royal Gold so far... with more to come.
Matt has another great royalty company in his portfolio that's a better buy than Royal Gold. And if you agree with Jim Rogers and think gold is due for a correction, this is a better pick for you. This company holds royalties on 17 different silver mines. And it's buying production at a 38% discount to market value. Like Royal Gold, this company sidesteps all the risk in mining and keeps all the upside. And it's trading well below its fair value. To get Matt's latest report – and his writeup on the huge precious-metals boom taking place in China – click here.
Digest readers are surely aware of Dan Ferris' affinity for retail World Dominator Wal-Mart. In his November 23 Extreme Value weekly update, Dan wrote:
I think we're in for a nasty several years. During that time, Wal-Mart will thrive as those who once shopped at more expensive stores do everything in their power to reduce their spending on groceries, clothing, electronics, jewelry, furniture... a typical Wal-Mart stocks 100,000 different items.
It's the low-price leader in many categories (especially groceries). Of course it's going to do well in a global recession.
The great thing about Wal-Mart... if it's not already the low-price leader in a category, it has the financial strength to temporarily lower prices to force out competitors. Video-game retailer GameStop fell nearly 10% today on concerns it may have to slash prices after Wal-Mart discounted its top video games.
Wal-Mart is cutting prices on the top-25 video games by as much as 20% through December 24. If GameStop wants to make any money this holiday season, it will need to cut prices, too. Ironically, GameStop strategically positioned many of its stores to benefit from Wal-Mart's foot traffic.
Wal-Mart is just one of Dan's World Dominator picks. To access Dan's entire World Dominator portfolio – probably the safest way to play this market – click here...
New highs: Vanguard Tax Exempt (VWSTX), Market Vectors Gold Miners ETF (GDX), Johnson & Johnson (JNJ), Visa (V), Burlington Northern Santa Fe (BNI), iShares High Yield Bond Fund (HYG), Coca-Cola (KO), Procter & Gamble (PG), POSCO (PKX), Goldcorp (GG), European Goldfields (EGFDF.PK), Yamana (AUY), Providence Service Corporation (PRSC), Northgate Minerals (NXG), 3SBio (SSRX), Barrick Gold (ABX), Silver Wheaton (SLW), MAG Silver (MVG), Jinshan (JIN.TO), Sino Gold (SGX.AX), Ormat (ORA).
Some days it's good, some days it's bad. But we read 'em all and publish the best. Send us your feedback... feedback@stansberryresearch.com.
"I just want to let you know how truly enjoyable it was to be able to listen to several of your editors discuss, in a real-time setting, the various topics that came up. This was a really, really valuable addition to my Alliance membership. You are making some amazingly powerful and valuable services available that will result in droves of people to line up to give you their business. I'm glad I 'got it' several years ago. I appreciate the availability to the call after the fact, since I still have to work for a living and can't make it to the call when it is 'live.'" – Paid-up subscriber Edward J. Parker
Goldsmith comment: We've been receiving tons of great feedback about our first Off the Record conference call (which is currently only available to Alliance members). If you're not an Alliance member, and you'd like to hear our Off the Record call, watch your inbox tomorrow... We're granting free access to the call. I'll also give details in tomorrow's Digest.
"Oh, Porter (although maybe it's Ferris and Goldsmith today – not that it matters, you're all clones) – As usual, you and your crew get everything backwards. It's no wonder I lose money when I listen to you.
"Today I read: 'Bank of Japan is determined to do its part to keep the gold price high. The BoJ says it'll pump 10 trillion yen of new money (US$115 billion) into the Japanese economy.' In other words, BECAUSE the BoJ wants the price of gold to be high, it has decided to pump money into the Japanese economy. No, no, no. It's the other way around. The BoJ decided to pump money into the economy for a variety of reasons UNconnected to the price of gold. Your CONCLUSION is that the decision will keep gold high. To assert that the PURPOSE behind BoJ's decision was to keep the price of gold high is simply an unsubstantiated claim and assumption on your part. It's the type of slander you usually reserve for our President. And, personally, I think it's ridiculous. And for this brilliant analysis, I paid money.
"Steve Sjuggerud, I can believe. The rest of you are whining, millionaire ideologues who whimper whenever the idiotic financial scams you both analyze and promote do not conform with your desires. I wish Charles Dickens were still alive to write a book about you. At least I wish you understood the difference between A causes B, and B may result in A." – Paid-up subscriber Jim Wood
Goldsmith comment: Jim, so we're clear, it's Goldsmith today. We understand Japan did not print money just to keep gold prices high. Japan is pushing for inflation to ease the burden of its massive debt load. Dan was drawing a CONCLUSION... Monetary easing across the globe is pushing gold higher. He was writing tongue in cheek.
Regards,
Sean Goldsmith
Baltimore, Maryland
December 2, 2009