Go for gold to beat the coming currency crisis! (page 1 of 2)

Thus it should come as no surprise that the heaviest buying of mutual funds specializing in one sector of the market always occurs after this sector already had a huge rally. Take for instance the recently much discussed high tech sector. Most of the buying of high tech funds and Internet stocks took place between October 1999 and October 2000, right around the top of the NASDAQ and the peak of most high tech companies.

Today, I should like to advocate the purchase of a group of stocks, which has over the last twenty years been the worst under-performer. This group consists of gold mining companies around the world, all of which have a combined stock market capitalization of only $30 billion.

In other words, you could buy the world's entire gold mining industry for just $ 30 billion. A bargain when you consider that Cisco and Microsoft alone had earlier last year a combined stock market capitalization of more than $1 trillion, and that Amazon.com was valued at its peak at $35 billion!

In addition, the market value all the world's gold mines is tiny when compared to the world's total stock market capitalization of around $35 trillion. Before going into my main argument for investing in gold and gold shares, let me discuss some of the gold market's fundamentals.

Every year in the 1990s, physical gold demand has exceeded the annual supply of approximately 2,500 tons - valued at present at about $35 billion - by about 300 to 500 tons. Compare this to the annual supply of bonds in the world, which amounts to about $3.5 trillion and it becomes evident, how small the supply of gold is.

Then consider this. In the year 2000, Indians bought about 850 tons of gold. In other words, in India, where the GDP per capita is only $300 per annum, every man, woman and child bought almost 1 gram of gold each. If gold became one day as popular as platinum or the NASDAQ is at present, and every person in the world bought just one gram of gold, it would generate an annual demand of 6,000 tons, which is about 2.5 times its annual supply from mines.

Also, noteworthy is the fact that the outstanding gold short positions amount to between five and eight years of production. So if a gold market rally took place - for whatever reason - massive short covering could drive the gold price far higher than anyone currently thinks possible.

Then, if we compare the price of gold to the Dow Jones Industrial Average in the US, it is clear that gold has never been as cheap as right now. In 1980, when the gold price reached more than $800 per ounce, you could have bought with one ounce of gold an entire Dow Jones, which at the time was hovering around the 800 level.

Today, it would take you more than 40 ounces of gold to buy a Dow Jones. Ergo, stocks are now by historical standards high, while gold is extremely low.

So, why is it that gold has performed so poorly when the fundamentals for buying gold seem to be rather compelling? Gold has performed poorly, especially given the above mentioned imbalance of demand over supply, because central banks in Europe have been massive sellers of their gold holdings over the last few years.

Moreover, there may have been some concerted effort by the US Treasury, the Fed and a number of banks to depress the gold price through active market manipulation. It has been alleged that such manipulation of the gold market was designed to artificially depress the gold price in order to give Americans the impression that there is little inflation in the system, and also to protect some financial institutions' huge short positions.