Sector IM's Angelos Damaskos explains why he thinks the gold price will continue to rise.
Many observers have been calling the gold price a bubble for several years now but the price has continued to rise.
Gold recently reached a high of above $1,500 per ounce for the first time in history and it is not unlikely that we may see an ounce of gold selling for over $1,600 before the year end.
Putting inflation-adjusted pricing and long-term history aside, it is worthwhile looking at the current situation and the drivers of gold prices today. The world economy is still suffering from the excesses of the last decade and the large debts accumulated at both a government and private level in the developed economies.
The massive rescue and stimuli packages thrown into the system by the governments of the US, the eurozone and the UK have not only increased debt levels to dangerous levels but have also stoked inflation. This printing of new money has resulted in the dollar, euro and pound becoming devalued against stronger currencies for the last two years.
Clearly investors are concerned about the global purchasing power of their money and are moving to alternative stores of value. Gold has been considered a store of value since antiquity, providing a haven in times of inflation or geo-political instability. It has traditionally been the one valuable asset that retains its value in times of currency devaluation, and it stands to benefit from recent economic events.
The supply of gold is relatively small and studies indicate that the global investment allocation to gold and related investments is less than 1% of assets. Should there be a continued move by investors to increase this allocation, there would be considerable pressure on supply, with a consequent rise in price. As for a bubble, the biggest one has been the debt binge of the last ten years. Gold prices could continue rising for as long as global debt is a problem and inflation keeps rising out of control. How long this will be, only history will tell.
In the meantime, inv estors in gold are securing the purchasing power of their wealth. Focus Minerals Ltd, the largest holding in the Junior Gold portfolio is set to prosper in the rising gold price environment. The company has successfully raised additional capital to accelerate production from its latest mine as well as exploration activities in a new deposit.
Production is expected to grow from the current 73,000 ounces per annum to in excess of 130,000 oz within the next two years. The company’s prospects for exploration look promising and economies of scale with greater production should reduce operating costs.
Angelos Damaskos is CEO of Sector Investment Managers
Keith Barrett, head of research at Ingenious Asset Management, asks whether outperformance in US healthcare stocks can continue or if it is time to take profits.
Ardevora's Jermey Lang explains why he continues to have a nervous view towards many sectors and sticks to his 'lower risk' principles when it comes to investing.
RBC's James Jamieson argues too many investors still believe dividends imply a stock must be 'ex growth'.
US dollar strength, weak commodity prices and fears of a hard landing in China have made 2015 another difficult year for emerging market investors, so what next?
Awards now in their 13th year