What is certain is that when money devalues, commodities like gold, silver and oil don't. Gold and silver have intrinsic value that isn't easily replaced (few substitutes); their properties are valued both economically (industrially) & aesthetically and according to history, are reliable stores of money (gold was used as legal tender even before the first coins, silver use in rfid scanners and tracking devices is one of the sources of demand growth). Also, overall base metal production has been falling, at the same time central banks which used to be net suppliers have become net buyers. Countries like the United States have become increasingly reliant on quantitative easing to stimulate the economy; Quantitative easing has as a direct consequence the devaluation of curency which contributes more to inflationary pressures (if the effects aren't felt immediately they ultimately do later on when the economy heats up). U.S. deflation is part of the reason quantitative easing is such an attractive option (increasing the money supply lowers interest rates which raises prices through foreign currency markets) however the root of the deflation America is attempting to correct isn't even a result of high interest rates (more recently) or a money supply problem meaning the government may just be creating a new problem. (thetombstonenews: 'Quantitavie Easing') Some interesting facts about gold: 3/4 of all the gold ever extracted from the earth was mined after 1910. South Africa was the largest producer in most years since that time. Switzerland was the last country to tie its currency to the price of gold (1999). Until May 2009, all the gold ever extracted amounted to 5,835,876,025.6 ounces or about 85% of an ounce per person (165,446 tonnes). Gold weighs 19.3 times as much as water, is even more rare than diamonds, never oxidizes (maintains its shine), and in its more natural form is one of the softest metals.
When deciding on Gold ETF's/Gold Stocks consider this : contracts like the precious metals loan device (government/central banks) and those made by NYMEX/COMEX and London Precious Metals Clearing Limited (involves 6 big banks including JP Morgan) are short by a significant margin when it comes to the amount of gold and silver they need to cover those positions. Also, JP Morgan is now owner of a vault license, throwing more uncertainty into the equation as JP Morgan has used unallocated gold and silver to cover contracts. Though riskier, gold stocks also pay dividends annually or quarterly, in 2011 Q2 Barick Gold's African subsidiary doubled its dividend up to 3.2c/share for the quarter alone.
Also consider that the rise and fall of stocks isn't entirely determined by commodity prices. Other factors such as the enterprise value (see Yamana Gold blog entry), free cash flow (cash flow minus capital expenditure) and most importantly total cash cost per ounce (the main reason Canadian companies like Goldcorp and Eldorado Gold make it to the top in terms of market value while others like AngloGold and Gold Fields which produce and own a lot more than their counterparts, aren't ranked significantly higher) tend to have more of an effect on prices. There are many examples of gold companies that have a market value close to what it was 2 years ago despite commodity prices being many times higher; there was less than a 30% difference in market value for Agnico-Eagle Mines, Yamana Gold, Gold Fields, Kinross Gold (not considering the Red Back acquisition its capitalization was actually steady) while others like First Majestic Silver realized the change in price (was worth US $215 million in 2008 ten times less than in 2010 despite only producing 1.89 times less silver). Also, consider this: For most of 2008 when gold prices started their overall upward trend, it was the large cap companies that outperformed the small cap; the opposite was true in the summer of 2011 when gold prices broke through new levels, the change in behavior might simply be the result of a much higher support level for gold prices making high production costs less of an issue for startup companies (many more juniors entered the market in 2011 than in 2008). Physical gold and physical silver remains the safest investment option as there is less risk (no concerns regarding delivery of the asset) and the investor gets to realize 90-100% of the rise in gold and silver prices (on demand price paid by bullion dealers at coins stores for the metal). What the physical gold investor loses out on are dividends paid out by gold mining stocks. A major factor affecting spot prices, which is unrelated to stocks are margin calls. For example in early August of 2011 (when there was a lot of economic uncertainty) gold and silver spot prices declined at the same time major stock indices fell by their largest margins since the 2008 recession, the commodities selloff was sparked by a margin call (temporary selloff due to traders being required to meet call options). Recently, South Korea, Thailand and even debt-laden Greece added more gold to their reserves. (Gold Cartel losing, price to top $3000) On August 8, 2011 when stocks performed poorly, gold spiked again (gold is the first thing central banks/banks/investors hoard when they want a stable investment medium, also when banks realize they might have to fulfill their significant short positions) but don't be concerned about the more gradual silver rise (historically, silver has lagged gold (time) when increases occur; the reason is that banks and large investors tend to wait until gold gets too expensive before buying the white metal); also when gold gets too expensive jewelers, industrials turn to alternatives and silver is one of them. Also consider the gold/silver ratio which is 44 (August 8, 2011), much higher than the historic ratio of under 20. Silver has, in just 5 years gone from $14/oz to a support level of between $34 and $40 per ounce.
Goldcorp (GG), the lowest cost per ounce producer of gold among tier 1 companies. In 2010 it produced 23 million ounces of silver giving it the distinction of leading producer of silver among gold companies that year, though production was still only about half of BHP Billiton's (46.6 million ounces) it was high enough to rank 4th among all companies, ranking just behind Pan American Silver (24.3 million ounces). What's more, 77% of Goldcorp's 2P silver reserves (1.0 of 1.3 billion ounces) are at Penasquito, Mexico, a property that hasn't even reached commercial production yet.
First Majestic Silver (FR) has significant resources that don't show up as reserves because of their status, has one of the lowest cash costs industry-wide, nearly doubled silver production in 2010 and mints its own bullion bars and rounds (unlike many of its competitors like Pan American Silver which produce and market bullion through other companies (Northwest Territorial Mint for example).
Silver Standard Resources (SSRI) is another to keep watch of. The company is already a major producer and that's with only 1 of its 4 properties producing. Cash costs are still high because many new mines have high initial production, initial construction and other development costs.
Hecla Mining Company - The gold to silver ratio remains high (about 43 compared to 35 on May 3, 2011 (Silver 44, Gold 1540)) but is starting to come down; August 19-22 gold was up about 5.5% but silver was up more than 9%). Hecla Mining, like many other silver miners, has suffered from volatile prices since silver recorded a high of about $49/oz on April 29, 2011 however with gold about 20% higher than it was at that time and silver 10% lower, silver should eventually break through into the $50 level again. Hecla Mining has high growth potential relative to other silver miners because its fall over the last couple months has been more pronounced (as of Monday morning Aug 22; -33% last 6 months, -11.6% last 3 months, -13% last month compared to Coeur d'Alene (-6.7%, +.24%, -8% respectively) and Silver Standard Resources (-3%, -9%, -12.6% respectively); during that period First Majestic released reports confirming growth in production and earnings in 2010 and 2011 (71.8% rise in silver production in 2010 with cash costs among the lowest industry-wide (near $7/oz) compared to $12/oz for Pan American Silver (largest pure-play silver producer). Hecla also has low net cash costs realized (-$1/oz in 2010).
Primary silver producers (2010)
Fresnillo (38.6 million), Pan American Silver (24.3 million), Silver Wheaton (23.865 million up 37%) Coeur d'Alene Mines (16.8 million), Hecla Mining (10.566 million down 3.8%), First Majestic Silver (6.56 million up 72%), Silver Standard Resources (6.302 million up 48%) and Silvercorp Metals (4.624 million up 10%). (individual company notices)