-- Posted Sunday, 25 January 2009 | Digg This Article | | Source: GoldSeek.com

With gold prices back above $900 and silver at $12 an ounce, gold producers have reason to be cheerful about the outlook as a flight from all paper currencies to one of fixed supply gathers pace.

However, gold and silver mining is an energy intensive business, with up to 25 per cent of costs going on fuel. Thus falling energy costs will feed straight through to the bottom line for gold and silver producers this year.

Dollar bonus

It gets better. Gold and silver are priced in dollars but most mining companies have operations in non-dollar countries. Therefore, local costs are falling at a time when precious metal prices are rising.

Could precious metal stocks be one of the few to rise this year? Certainly when you have consumer manufacturers like Samsung or Toyota producing losses, it is notable that precious metal producers are among the only industries to be guaranteed rising profits this year.

This is a win-win environment for gold and silver stocks with falling production costs and rising precious metal prices. Needless to say the latter increases the leverage of owning stocks relative to the precious metals.

Now buyers can point to last year’s huge underperformance by precious metal stocks as a reason for caution. But surely this just makes the upside greater in what looks like a no-lose investment opportunity.

Of course, you should spread your risk and do your due diligence before buying any stock. And yet, again, in a rising market all ships tend to rise and those now perceived as most risky may do best.

Which explorers?

That might mean a second coming for the explorer stocks which have been savagely beaten down, and surely the trick here is to buy those which have achieved some degree of public notoriety as investors are more likely to buy something of which they have already heard.

This is perhaps a bit late for those who staked their last cent on exploration stocks two years ago. But precious metal claims are sure to soar in value as gold and silver prices head upwards, and lest we forget the explorers hold those claims and that is the real value of these stocks.

Bonds, Stocks, Real Estate Down, Gold Up!

Since the start of the year 30-year US Treasury bonds have fallen by 10 per cent, the Dow Jones Index 7.5 per cent and real estate continues on its downward track. Gold is up by almost seven per cent.

Is 2009 the year gold finally come into its own as a safe haven asset? Certainly everything is pointing the way of precious metals, and now it looks as if the bond market is failing as a competitor as a safe haven.

Falling bond prices

The last shoe to drop in financial markets is the biggest of the lot. Bond markets are huge and critically impact on currencies, government borrowing and by implication precious metal prices.

At the fundamental level it is very easy to see why a Saudi investor or Gulf State might today buy gold or silver above US treasury bonds. The tiny yield on treasuries assumes zero inflation at a time when government spending is soaring and all history suggest that this will mean inflation.

If nothing else this has undermined the argument that gold does not pay interest. Moreover, investors can see that governments can inflate the supply of bonds - but not the supply of gold and silver.

Perhaps that is why the price of gold and its cheaper-cousin silver is up since the start of the year. There are some big physical buyers out there, and the price is responding to increased demand and almost fixed supply.

That could be a disappointment to the gold bug conspiracy theorists who have spent the past decade coming up with ever more elaborate arguments about who is fixing what, where and when.

This is like President Obama complaining that China manipulates the yuan, just as if the US does not manipulate the dollar - this is what central banks do, for better or worse. Yes they might pull gold down for a few hours on Monday but this is short term and less and less effective.

Systemic failure

The problem now is that we face systemic financial failure. The central banks have made massive policy errors and more and more investors are beginning to realize the obvious truth: they do not know what they are doing, and will have no more success in solving these problems than they did in avoiding them in the first place.

It is always my beef with conspiracy theorists that the cock-up theory of history - with random actions by idiots - holds up much better to analysis.

But when financial systems come crashing down it is gold and silver - the only true money - that you want to be holding. Bonds, shares and real estate are going down in 2009 - and don’t forget that bonds will ultimately take the US dollar down too.

Holders of a diversified portfolio of precious metal assets will make a fortune as this narrow market becomes the object of incredible demand. It is a historic opportunity for those who move quickly. Save yourself, why go down with the crowd!

-- Posted Sunday, 25 January 2009 | Digg This Article

About Peter Cooper:
Oxford University educated financial journalist Peter Cooper found himself made redundant by Emap plc in London in the mid-1990s and decided to rebuild his career in Dubai as launch editor of the pioneering magazine Gulf Business. He returned briefly to London in 1999 to complete his first book, a history of the Bovis construction group.

Then in 2000 he went back to Dubai to become an Internet entrepreneur, just as the dot-com market crashed. But he stumbled across the opportunity to become a partner in www.ameinfo.com, which later became the Middle East's leading English language business news website.

Over the course of the next seven years he had a ringside seat as editor-in-chief writing about the remarkable transformation of Dubai into a global business and financial hub city. At the same time www.ameinfo.com prospered and was sold in 2006 to Emap plc for $27 million, completing the career circle back to where it began a decade earlier.

He remains a lively commentator and columnist as a freelance journalist based in Dubai and travels extensively each summer with his wife Svetlana. His financial blog www.arabianmoney.net is attracting increasing attention with its focus on investment in gold and silver as a means of prospering during a time of great consumer price inflation and asset price deflation.

Order my book online from this link

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