David Zeiler: Gold prices hit a record high of $1,718 an ounce in intraday trading yesterday (Monday) in response to Standard & Poor’s downgrade of the U.S. credit rating, and the continuing drumbeat of dreary global economic news will keep pushing the yellow metal higher.
In fact, Money Morning Contributing Editor Peter Krauth reiterated his belief that gold prices will more than double from current levels.
“I expect gold to reach $5,000 before this bull market peaks,” Krauth said. “I’m very open to the possibility that gold could correct from here, but I’d expect that to be nothing more than a short-term pullback.”
Following through on a months-long threat, S&P cut the U.S credit rating to AA+ from AAA late Friday, sending global stock markets tumbling and a flood of investors to one of the few safe havens available – gold.
“The S&P downgrade adds to concerns that investors have in the safety of U.S.- issued debt,” Krauth said, pointing out that Treasuries are “considered to be the safest in the world because of their previously unblemished AAA rating and their liquidity. When doubt is cast on such an important and ubiquitous investment instrument, it’s no surprise that gold, a traditional safe haven dating back millennia, is going to be a beneficiary.”
Although it had already risen 15% for the year as of Friday, the appeal of gold remains high among investors worried about sovereign debt problems in the United States and Europe, as well as a U.S. recovery that looks like it may tip into a double-dip recession.
“The surge in gold is a knee-jerk reaction to the downgrade and could prompt profit-taking, but concerns of slowing economic activity in the U.S. and the lack of concise action to tame its debt levels will likely see more diversification from U.S. assets, boosting demand for the ultimate safe haven,” FastMarkets analyst James Moore told the Wall Street Journal.
Gold on the Comex division of the New York Mercantile Exchange soared $66.40, a 4% pop, in overnight electronic trading Sunday night to a record $1,718.20 an ounce. After slipping below $1,700 in the morning, S&P’s follow-up announcement that it had also downgraded the credit ratings of mortgage giants Fannie Mae and Freddie Mac drove gold to $1,715.50 by 4 p.m.
Yet gold remains well below its inflation-adjusted peak set in 1980, when it sold for $850 an ounce – the equivalent of about $2,400 an ounce today.
Krauth sees plenty of money now going into gold from skeptics long unconvinced by the yellow metal’s bull market.
“At some point, many of those observers who’ve yet to participate decide to throw in the towel despite seeing gold at record prices, since they can no longer stand the thought and risks of not owning some,” Krauth said.
S&P said it decided to downgrade the U.S. credit rating partly because last week’s debt ceiling deal did not go far enough. Additionally, a recent series of glum reports have reinforced the idea that the U.S. economy is getting worse, not better.
Meanwhile, the European Central Bank (ECB) continues to struggle with the debt crisis in Portugal, Ireland, Italy, Greece and Spain (PIIGS). The ECB yesterday tried to head off deepening problems in Spain and Italy by buying more bonds from those nations.
With both Europe and the United States struggling with severe debt issues – and their respective currencies, the euro and the dollar, slumping — investors just keep buying gold, driving its price to record high after record high.
“At a time when investors are nervous of currencies, they’re nervous of equities, they’re nervous of everything, the only place for them to park their money is gold,” Gavin Wendt, director at Mine Life Pty Ltd., told Bloomberg News.
Krauth believes that buying gold has become an investing necessity under the circumstances – and a good way to get started if you haven’t already is with an exchange-traded fund (ETF).
“Investors need to ask themselves if they think that the debt problems in the U.S. and Europe are anywhere close to being resolved, keeping in mind that these are probably the two most liquid fiat currencies in the world,” Krauth said. “If their conclusion is no, and they expect, as do I, that the issuing governments are going to keep printing money to buy their ongoing bond issues and to bail out their anemic banks, then they must own some gold.”
And despite record high gold prices, the sooner the better.
“If they don’t own any whatsoever already, then they should buy an initial position immediately,” Krauth said. “Then, when the next correction comes — and it will — they should muster the fortitude to buy more, and keep doing this until they feel they own enough as to feel comfortable with their position.”
The Market Vectors Gold Miners ETF (NYSE:GDX) is one of Krauth’s favorite plays. GDX is a great way to invest in the AMEX Gold Bugs Index I described earlier. This ETF is composed of the world’s largest and most-liquid gold and silver-mining companies, averaging about 10 million shares in daily trading, and a reasonable management expense ratio of 0.53%
Another option is the SPDR Gold Trust ETF (NYSE:GLD).
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