Stockerati

As we enter the contraction phase of the economy (a state which leads to recession), inflation is rampant. The USD‘s weak and will stay so due to the inability of the Fed to increase the interest rates. Had we not experienced the sub-prime crisis and the resulting mess in the financial sector; the interest rates would’ve surely been increased by now. Nevertheless, an increase in interest rates is imminent and inevitable.

Having said this, I strongly feel that Gold is going to see a huge growth going forward. Given the data-driven person I am, my belief is derived from the following data-points.

• We are in an Oil bubble right now. It’s bound to burst (in my opinion by the end of the year oil prices will settle in the $120-140 range) as unlike the 1970’s this time around the prices are not being driven up due to a shortage in supply. Instead they are being driven to crazy levels by sheer speculation and market-mongering. This bubble burst is forcing investors into a holding pattern and what better investment to make than Gold. The price of Gold went up and settled nicely in the $900’s which is reasonably priced for most investors, today
• Inflation is high. Given that the M3 numbers are not disclosed by the Feds any longer, the 4.2% official number is a farce.
• The price of Oil is eating into margins of finished and unfinished goods and thereby driving inflation up.
• The chart below gives the price of Gold in today’s (2006) dollars and the actual value. Two interesting points to note
• During times of inflation or recession in the economy, Gold prices always sky-rocket
• In the late 70s and early 80’s when the US was in severe recession or stagflation (depending on which of the two you ardently believe in), the interest rates went up tremendously to curb the inflation rates. At that time, Gold traded at over $1600 in today’s dollars

• Historically, whenever the stock market’s down, investors turn to gold to secure their investments. This next chart explains the Dow/Gold ratio very clearly. Gold’s been on a rise since 2001, mainly due to the increase in the monetary supply in the US and Europe (monetary inflation) and the high deficits (account and trade) in the US, which has driven up inflation in turn and also weakened the dollar

Gold ‘s rise will continue and we can expect to see Gold get very close to the $1000- $1200 mark in the next 6-12 months. Gold investments are usually in the following form:

• Bars
• Coins
• Exchange-traded funds (Gold ETF’s or GETFs)
• Derivatives
• Mining companies

The following chart shows how GETFs and other unhedged and hedged gold stocks have done in the recent past. It’s been on the rise and will continue to grow as more investors withdraw from the stock market and try to consolidate their investments into a solid sector.

A quick look at the price of Gold shows that Gold is in a steady-state. It’s an early trend and has the potential for great returns, even in this receding economy.

Finally, the performance of a company GOLD and a Gold index ^XAU against the Dow, Nasdaq and S&P500 over the past 5 years is shown below. Gold indeed is on a roll.

Some good investment choices, if Gold’s your thing/

• Yamaha Gold (AUY), mining stock
• Randgold Resources Ltd (GOLD), mining stock
• Fidelity Select Gold (FSAGX), Mutual Fund
• American Century Global Gold (BGEIX), Mutual Fund
• streetTRACKS Gold Shares (GLD), an ETF which tracks the price of the bullion
• iShares COMEX Gold Trust (IAU), an ETF which tracks the price of the bullion
• MarketVectors Gold Miners (GDX), an ETF which tracks stocks of gold mining companies

As I said earlier, the golden run of gold is all set to continue.