The price of the yellow metal advanced past $685 last week on US dollar weakness, yet gold stocks have lagged behind in the recovery from the sell-off that started last May. If gold has now got the wind in its sails then gold shares should be due for a sharp rally very soon and indeed leverage off gold's advance.
With monetary inflation now surging worldwide, that is to say the money supply is running out-of-control, then a much higher gold price is just a question of time, and it maybe not that much time either.
Last week we saw the US dollar fall to a two-year low against the euro as this debasement of the world's reserve currency gathered pace. Yet with M3 money supply statistics now abandoned by the Federal Reserve it is impossible to gauge just how serious this problem might be although the yawning twin deficits suggest it can only get worse and worse, unless corrected by a recession.
Gold is the only true currency and fiat paper currencies like the US dollar devalue against this fixed store of value in times of inflation. But there is a tipping point at which the gradual shift away from the US dollar will become a rout as holders of the US currency seek an alternative.
$3,000 an ounce
Then gold will start a rapid ascent in value, back towards an inflation-adjusted, all-time high of around $3,000 an ounce. Supporters of the GATA pressure group maintain that it is only central bank collusion that keeps gold prices low, and that collusion is breaking down with even the IMF now actively canvassing rule changes to make this a more transparent market.
Gold will also likely be an alternative asset class of choice if global stock markets tumble and the US real estate crash spreads. This happened in the mid-1970s and it can happen again in the 2000s, as post-crash investors look for a new asset class and do not rush back to where they have just been burned.
Leveraging this forward price momentum for gold will therefore likely become a major investment theme of the next few years. And gold stocks will be a favorite method. For as the gold price rises, mining costs remain relatively static and so the profits of gold companies increase by a higher percentage than the metal itself.
Also junior mining and exploration companies with claims may find that their modest assets suddenly zoom up in value as producers seek new sources of gold and bid up their value. That is why the highest leverage to a rising gold price can be obtained by buying smaller gold companies in a boom.
This is where the hundred-fold increases will be found in the next gold boom, as in the late 1970s, although the metal itself and the bigger companies will provide very large rewards at a time when other asset classes may struggle to deliver returns.
At the moment many investors take a small position in gold as a hedge against troubled times, and they will take an even bigger position when things do go wrong, so buy now while gold stocks are relatively cheap.