US NATIONAL DEBT

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Gold: How High . . . and How Much?

June 1, 2011

Jeffrey Nichols, Senior Economic Advisor to Rosland Capital

Managing Director, American Precious Metals Advisors


A few weeks ago, when gold and silver were near $1470 and $32 an ounce, respectively, quite a few economists and financial journalists were quick to pronounce the death of the decade-long bull market in precious metals and the start of a newborn bear market. Only days earlier, gold had registered a new all-time high near $1577 and silver was merely pennies away from regaining its 1980 historic peak of $50 an ounce.

At Rosland Capital, we foresaw and expected the recent correction in precious metals prices – believing that gold and, even more so, silver had from a technical or chartist perspective simply risen too far, too fast.

Even as precious metals prices plumbed their recent depths, we said “gold’s key price drivers all remain supportive,” advising clients to expect a snap-back with new all-time highs in the months ahead with the long-term uptrend continuing for several more years.

See our May 25th Rosland Capital Gold Commentary for a detailed review of gold’s bullish building blocks.

So just how high will gold prices go from here? I expect the yellow metal’s price will hit $1700 an ounce by the end of this year – that’s only ten percent above today’s price – and I wouldn’t be at all surprised to see it even higher.

Looking further out, I believe we are likely to see gold at $2000 an ounce next year, and possibly $3000 or even $5000 an ounce before the gold-price cycle moves into reverse in the middle or later years of this decade.

At the same time, gold prices are likely to remain volatile registering big short-term swings both up and down. Just as we saw in early May, sizable intermittent price declines may lead some to question the bull market’s staying power. I can only warn you not to get caught prematurely in a bear trap.

I recently discussed gold trends –and my price forecast – with Pimm Fox, host of “Taking Stock” on Bloomberg Television. Here’s the link to show.

One question Pimm Fox asked during the interview was “how much gold and in what form?” I advocate most investors, both individuals and institutionals, hold a “core” position of five-to-ten percent of their investible assets in physical gold. At times, some smart investors may wish to hold more gold for short-term appreciation or add silver to their precious metals portfolio in addition to their core long-term gold position.

By physical gold, I mean the real thing – not paper gold, derivatives, or mining shares: For most retail investors, bullion coins like South African Krugerrands, Canadian Maple Leafs, or American Eagles and, for most institutional investors, good-delivery bars that are either COMEX or London deliverable.

Be aware that there are additional risks associated with paper gold products and other gold derivatives – risks that can be avoided or mitigated by purchasing and taking delivery of the real thing.

It seems that the University of Texas Investment Management Company, which manages the second-largest endowment fund in the country after Harvard University, agrees, having recently taken delivery of 20.7 tons of solid gold, gold that it now stores in a bank vault deep in the bedrock of Manhattan.

And the University of Texas fund managers are not alone: Some other institutional investors have been in the news during the past year or two, not just for buying gold, but also for taking physical delivery rather than, for example, holding shares in a gold exchange-traded fund.

I am often asked about gold and silver mining shares. Selected mining shares may have a role in some investment programs – but mining shares are not physical gold and should not be included in your “core” investment.

Be warned: gold and silver mining shares carry significant additional risks, risks that are not associated with buying and holding the physical metal. And, the recent experience of mining shares has disappointed investors who thought they were buying a leveraged gold investment. So far this year, the popular indexes of gold and silver mining shares, for example, have actually lost about ten percent of their value . . . but real gold, physical gold, has appreciated by roughly ten percent over the same period.

Remember, holding investments the value of which are presumably related to the price of gold – including futures and options contracts; mutual, closed-end or exchange-traded funds; gold trusts and other paper products; or mining shares – all carry addition risks and are just not the same thing as owning the metal itself in a form that you can pick up and hold in your own two hands.