Since 2001 The Price of Gold Is Up 600% linked To Central Bank Purchases & Investment Related Demand, overall Net Hedging by Mining Companies Up Only Twice in Last Five Years (quarterly)

   Since April 10, 2001 when the price of gold hit a low of about $256/oz it has been steadily increasing on the back of higher investment related demand (represented 37% of total demand in 2010 up from just 4% in 2000), higher overall demand (3,812.2 tonnes 9% higher than 2009), and greater interest shown in the yellow metal by Asia (China's demand for bars and coins accounted for 13.5% of all gold demand by value, that's up 70% in just one year). (World Gold Council) Jewelry accounts for roughly 50% of gold demand down from 85% in 2000 but up from 43% in 2009. In the first quarter of 2011 Chinese demand for gold (25% of all gold demand) exceeded demand from Indians (23% of global gold demand) who were previous to that the largest consumers of gold (90.9 metric tons compared to India's 85.6 metric tons, China's represented a doubling over the previous year) (China Is Now Top Gold Bug); In 2010 consumer demand in India led all countries, it accounted for 25% (963.1 tonnes) of all global demand for gold, that's up from 16.6% the year before. In other countries like Greece, economic turmoil is causing demand for bullion to spike. (Financial Times: Greek savers rush for gold)

China: If, as many suggest, the People's Republic of China lets the RMB increase in value relative to the USD, that will weaken demand for gold in the short term as investors see the new exchange rate as a sign of economic stability but in the long run, the stronger RMB will increase Chinese demand for Gold due to its greater purchasing power. Also, a stronger RMB will raise Chinese import demand, indirectly propping up gold demand abroad too.

Because of weakened global reserve currencies (euro/usd) and a low portion of portfolios (1% but begining to show growth) and central bank reserves in gold (central banks sold much of their holdings in the early 2000's/since 2009 they have become net buyers) gold prices are in the midst of a long term upward trend. (Pierre Lassonde, Franco-Nevada) In 2009 central banks held 17.5% of all gold estimated to exist above ground (940M out of 5.5B ounces). As recently as 2005 central banks gold selling contributed as much as 14% of the gold supply. (Seeking Alpha: Gold Soars on Falling Supply and Rising Demand) In early to mid 2011, the central banks of Mexico (99.1 tonnes), Russia (41.8 tonnes), South Korea (25 tonnes) and Thailand (just over 9 tonnes) were among the largest buyers of physical gold. As of 2011 the world's largest exchange traded fund, SPDR Gold Shares ranks 6th among all entities in terms of its gold reserves, it owns 1213.9M tonnes of gold which is 4.5% more than China (1161.6M), 30.96% more than Russia (926.9M) and 97.5% more than India (614.6M). SPDR has just over half of all the gold held by gold etf's. (cnbc: The World's Biggest Gold Reserves)

While gold demand is rising from all areas (consumer, jewelry, central banks, industry: total up 9%) total supply is not (up only 2% in 2010) and that's putting even more pressure on the price. (http://www.gold.org/download/pub_archive/pdf/GDT_Q4_2010.pdf) Output from gold mining makes up about 60% of the supply (gold output from mining declined in the seven years leading up to 2008). Another reason to expect higher prices; Companies are closing their hedge books (Barrick Gold led the charge in 2009 it cost them $5.6B, AngloGold Ashanti in October 2010 after it raised $1.58B to close it, Kinross Gold removed 90,000 ounces hedged in the first quarter of 2011 however it was the only major company to do that in 2011). Total gold hedged by miners amounts to 4.88 million ounces (1Q 2011); The first quarter of 2011 was just the second of 21 quarters since 2006 to show any increase in net hedging. (Gold miners hedge in Q1, big sales unlikely: report) Also to consider, the ceo's of Newmont Mining and AngloGold Ashanti the second and third biggest gold producing companies, predict that gold will exceed $2,200 an ounce by 2012. (reuters: Mining CEOs expect gold prices to keep rising)

If, as Franco-Nevada suggests, Asian central banks increase their minimum weighting in gold to 15% another 17,000 tonnes would be added to demand over the next few years. Gold ETF's could hoard more gold too with interest in physical gold higher than at any point in their history (in the USA they only date back to November 18, 2004, StreetTracks Gold Trust exchange-traded fund but since then they accounted for 2,300 tonnes of net demand). Gold companies for the most part have wide profit margins making them popular among both institutional investors and others.

Risks Assosicated With Gold Exchange Traded Funds & The Benefits of Direct Ownership (physical gold)

   Gold ETF's are index traded commodity funds with a total net worth that's tied to the value of its holdings of physical gold (for example SPDR's (ETF) market value on August 26 was $75.07B about the same as the total value of its 39.6M ounces of gold). The physical gold is stored in vaults/warehouses operated either by groups of institutions (London Precious Metals Clearing Limited made up of six entities) or individual ones that have been granted a vault license (as in the case with JP Morgan). Shares are issued, giving individual private investors exposure to commodity price movements. In general, ETF's have low tax costs in addition to other cost efficiencies, making them increasingly popular among investors. The first successful ETF ever launched was the Toronto Index Participation Shares (tracked the TSX exchange's 35 biggest stocks) which began trading in 1990.

Gold exchange-traded funds trade on stock exchanges like any other fund however their portfolio consists of only one asset, physical gold. Two of the most actively traded American ones are IShares COMEX Gold Trust (IAU, large cap) and SPDR Gold Trust (GLD, one of the largest in the world, started in 2004). Jewelry is also an important source of the physical gold supply, in 2007 it accounted for 25% of total supply. In terms of bullion, Kruggerands issued since 1967 and gold bars (some vaults require the stored bars to be a specific size, usually between 350 and 400 ounces) have traditionally been the most widely used. Alternatively, gold mutual funds aren't as dependent on physical gold; Their asset types include a range of gold stocks/companies (gold companies, for the most part have wide profit margins, making them attractive to all types of investors).

In many cases Gold ETF's have management and accountability issues. Since their early beginnings, there has been substantial growth in the size of Gold ETF's (10 largest American ones hold about 2,200 tons (2,000 tonnes/70.4M ounces) of pure gold in the form of bullion bars, other countries like China have launched their own gold trading platforms). (China's Gold Intake:like Sending Oil to Saudis) making the accountability issue an even greater concern. There is also growing angst over just how much gold is actually in the world's vaults; in March 2008 90 kg of fake gold was discovered in the vaults of Ethiopia's National Bank (replaced with gold plated steel), that happened even though gold sold to the central bank is required to undergo certification by the Geological Survey. (BBC News: Fake fears over Ethiopia's gold) In Europe, gold plated Tungsten was found at Germany's largest private gold refinery, though alarming that doesn't necessarily mean the government certified any of it.

There's also risk in the US where SPDR, the world's biggest physically-backed gold trust states in its list of risk factors:
"Because neither the Trustee nor the Custodian oversees or monitors the activities of subcustodians who may temporarily hold the Trust’s gold bars until transported to the Custodian’s London vault, failure by the subcustodians to exercise due care in the safekeeping of the Trust’s gold bars could result in a loss to the Trust." and "Gold bars allocated to the Trust in connection with the creation of a Basket may not meet the London Good Delivery Standards and, if a Basket is issued against such gold, the Trust may suffer a loss."

Owning physical gold eliminates those risks, removing concerns regarding delivery of the asset however the new costs makes it much more expensive to do especially if you're in it as a short term investor (dealer fees can range from a couple dollars to more than ten dollars an ounce over spot, ensuring secure storage of the physical asset is costly as well as time consuming).

Countries are taking more interest in gold; 10% of all foreign exchange reserves are in gold. (World Gold Council) South Korea purchased 25 tonnes of gold in the summer of 2011 for $1.24 billion, making its total reserves 17 times larger (39.4 tonnes) and ranking 45th among all countries. In 2011 Russia (41.8 tonnes), Thailand (9.3 tonnes) and Mexico (99.2 tonnes) also increased their reserves of gold. China's massive holdings only equal about 1.6% of their currency reserves. (S Korea buys gold as safe haven, first time since '98)

Because the prices of gold ETF's is more closely linked to the price of gold than other investment options (individual mining companies, mutual funds), risk also comes from spot price volatility (some companies actually hedge against that by fixing the price at which they agree to sell their gold in the near future). There is also slightly more risk than with mutual funds because like stocks, ETF's trade all day long (like their underlying commodities which also vary in price throughout the day, for mutual funds trading in the underlying stocks ends at the conclusion of the trading day and so they do as well).

Some other notes:
-If any widely used currency ever failed a new gold standard could be implemented as a temporary fix until the situation is resolved.
-Tungsten has nearly the same density as gold but differs in its color and hardness. Thermal conduction of gold (atomic number 79) is about two times that of tungsten (atomic number 74), the ratio of boiling points is also two.

Investing In Gold and Silver Physical Gold or Stocks and Which Companies To Look For (production by company)

&nbsp&nbsp When high inflation follows the beginning of a recession, they combine to produce long term stagflation making true hedges against inflation harder to come by due to the compound effect and its impact on currency markets. (high inflation in the world's developing economies is one of the key factors propping up long term gold prices) Currently, a number of the world's major economies find themselves in that situation and that's threatening to destabilize the world economy; Because of the changing face of the world's economy (relatively new sectors like the Quaternary playing a larger, central role), the way people do business and most importantly the much more deeply rooted connections nations have with each other, history can't be used as a guide for people looking for answers. Though risky, during the year, bonds have had the second highest rate of return second only to gold (price of gold up 43.93% or $527.70 (August 9, 2010 - August 9, 2011). The market volatility, inflation and overall economic tightening are errily reminiscent of the 2008 recession, the big problem now though is that the US government has used up most of its arsenal (quantitative easing, stimulus) leaving it highly vulnerable.

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. or consider Palladium investing

Investing In Gold and Silver Physical Gold or Stocks and Which Companies To Look For (production by company)

When high inflation follows the beginning of a recession, they combine to produce long term stagflation making true hedges against inflation harder to come by due to the compound effect and its impact on currency markets. Currently, a number of the world's major economies find themselves in that situation and that's threatening to destabilize the world economy; Because of the changing face of the world's economy (relatively new sectors like the Quaternary playing a larger, central role), the way people do business and most importantly the much more deeply rooted connections nations have with each other, history can't be used as a guide for people looking for answers. Though risky, during the year, bonds have had the second highest rate of return second only to gold (price of gold up 43.93% or $527.70 (August 9, 2010 - August 9, 2011). The market volatility, inflation and overall economic tightening are errily reminiscent of the 2008 recession, the big problem now though is that the US government has used up most of its arsenal (quantitative easing, stimulus) leaving it highly vulnerable.

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)