It could well be that the gold price breaks through the $1,000-an-ounce barrier this month with financial markets still volatile and a power shortage halting production at South Africa’s mines, the biggest the world.
The emergency interest rate cuts by the Federal Reserve in January down to three per cent also increase the attractiveness of gold over cash, as gold pays investors no dividend. That is perhaps why the yellow metal overcame its previous all-time high of $850 and romped past the $900 mark.
However, gold shares have headed in the opposite direction. Perhaps this is understandable in the case of the South African miners hit by a total shutdown, with annual profits under threat. But for the rest of the gold mining community higher gold prices automatically translate into higher profits.
Gold shares underperform
Indeed, until the past year or so, the general rule was that gold shares outperformed the increase in the price of gold by a factor of three. However, rising energy costs have affected the economics of gold mines adversely, and share prices have been discounting the surge in oil prices.
It could be that this is now looking overdone. The outlook for oil prices is probably a correction in the face of a US or even global recession.
In the meantime it is hard to get terribly pessimistic about the outlook for gold prices with the kind of monetary inflation now underway. Any correction in the gold price is unlikely to be of long duration, and just another buying opportunity in what increasingly seems like a long bull market for precious metals.
Top gold share advisors generally keep their share tips secret. But in a radio interview last autumn, the 1970s gold guru Joseph Granville, still producing an excellent newsletter at the age of 83, announced his favorites as: Agnico-Eagle, Barrick Gold, Coeur d’Alene, Golden Star, Gold Corp., Gold Fields, Harmony Gold, Iamgold, Kinross Gold, Linux Gold, Royal Gold and Yamana Gold.
This list gives gold share investors a broad and diversified portfolio. The industry giant Barrick Gold is represented along with South Africans including Gold Fields and Harmony Gold, and much smaller companies like Linux Gold and Royal Gold which Granville argues have the biggest upside potential in a bull market for gold shares.
But if the gold price does continue its inexorable rise, perhaps towards an inflation adjusted all-time high of $2,000 an ounce or a money supply adjusted all-time high of $5,000 an ounce then investing in Granville’s portfolio at this moment in time – while gold share prices are on the floor – is likely to prove hugely rewarding.