Weekend Edition:
Jim Rogers Is Not Selling Under Any Circumstances
The Best of The S&A Digest
In a recent interview with BusinessWeek, Jim Rogers gave his thoughts on everyone's favorite topic: gold... Rogers expects gold to hit $2,000 an ounce "sometime in the next decade." He's not buying at current prices. He thinks gold is currently too popular. But Rogers is "not selling under any circumstances," either.We may see a short-term correction in gold, but the fundamentals for its bull run are still intact. The market is growing less confident in paper money daily. And it's not just the U.S. dollar. Governments are running huge deficits around the world. As central banks continue printing cash, real interest rates will turn negative...
You could easily make the argument we're experiencing negative real rates today. Negative real interest rates are terrible for stocks, but great for gold.
Bank of Japan is doing its part to keep the gold price high. The BoJ says it'll pump 10 trillion yen of new money (US$115 billion) into the Japanese economy. Ironically, Alan Greenspan told Japan many years ago it should write off uncollectible debts so a recovery could get underway in earnest. Japan didn't do so, and now it's saddled with the highest debt of any developed nation, approximately 170% of GDP.
Such debts are never paid off. They're always inflated away. Of today's action, BoJ Governor and Chief Inflator Masaaki Shirakawa says there's more where that came from, "If there is a shortage of liquidity..." And let's face it, folks. When you've borrowed more money than anyone on Earth and there's no way it can ever be repaid, you're pretty much in a perpetual liquidity shortage.
While profligate governments and large institutional investors – like Rogers and Paulson – are bolstering the price of gold, the real gains in gold will come when central banks step up their purchases to diversify their foreign exchange reserves. The total value of the world's gold is around $6 trillion at today's prices, versus about $200 trillion in global financial assets. India already bought 200 metric tonnes in November. Russia, Mauritius, and Sri Lanka also bought gold.
The U.S., the world's largest gold owner, holds 8,133 metric tonnes, around 77% of its total foreign exchange reserves. The Bank of France holds 71% of its reserves. The Bank of Italy, 67%.Compare that to Asia... China, the world's sixth-largest owner of gold with more than 1,000 metric tonnes, has less than 2% of total reserves in gold (at $1,100 an ounce). Japan holds only 2.7%. India holds 7.5% (including the recent purchase). Russia, 4.9%. Hong Kong holds nearly zero.
So what happens when these countries decide to boost their gold reserves? Look at these numbers from Ian McCulley of Grant's Interest Rate Observer. (Also, thanks to Grant's for the numbers on foreign central banks' gold holdings):
If the nine [foreign exchange reserve holders in the world that are currently "underweight" gold] got it into their heads to boost their gold holdings to 10% of their reserves, they would have to acquire 11,174 metric tons, to 25%, they would need 33,254 metric tons.
For perspective, existing official holdings currently sum to 29,634 metric tons, or 20% of the aforementioned 150,000 metric tons of aboveground gold.
In other words, gold will soar.
If you're looking for leverage to gold, Matt found a great play for his Resource Report readers... royalty companies.Back in March, I told my Resource Report readers to buy Royal Gold (RGLD). Royal Gold doesn't have a fleet of geologists and engineers out scouring the hills. It doesn't do the actual mining... All it does is evaluate mining projects and buy royalties.
That means it exchanges cash today for a long-term supply of gold from the mine. Resource Report readers are up 56% on Royal Gold so far... with more to come.
Matt has another great royalty company in his portfolio that's a better buy than Royal Gold. And if you agree with Jim Rogers and think gold is due for a correction, this is a better pick for you. This company holds royalties on 17 different silver mines. And it's buying production at a 38% discount to market value.
Like Royal Gold, this company sidesteps all the risk in mining and keeps all the upside. And it's trading well below its fair value. To get Matt's latest report – and his writeup on the huge precious-metals boom taking place in China – click here.
Regards,
S&A Research
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