Gold jewelry has become so precious that nobody is buying it anymore.
No, that's not a quote from famed malapropster Yogi Berra. It's the hard truth facing the hard asset now fetching around $900 per ounce.
Gold jewelry demand rose 6% in terms of ounces in 2007, and spiked 22% in dollars to $54 billion worldwide. But according to Tom Winmill, portfolio manager for the $260 million Midas (MIDSX) fund, the Indian market, long a driver in gold jewelry, has almost entirely dried up.
So does a glut of recycled wedding bands spell the end of the gold rush?
"Jewelry demand has slackened off significantly and scrap is coming onto the market," says Winmill, whose precious metals-based fund has returned over 30% annually over the past five years. "Its something to be worried about, but growing investment demand will swing the market and push gold prices past $1000 an ounce."
The increased investment demand Winmill is counting on is a function of the increasingly inflationary economic environment. The Fed, for instance, has already hacked 125 basis points off the overnight lending rate. Congress will soon pass a stimulus package of potentially $200 billion. And prices for commodities like wheat and oil are soaring.
"If you have 4.1% inflation, like we do now, yet short-term interest rates remain around 2%, then the consumer is losing to negative real interest rates," says Winmill. "Buying a CD will only lose you money. The only answer is to borrow as much money as possible and buy hard assets like gold."
And silver too. Silver has been hitting new highs close to $18 an ounce, also driven by investment demand. Silver is a small market compared to gold, but the introduction of the iShares Silver Trust exchange traded fund has given
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investors a way to invest in the previously administratively burdensome metal. New industrial uses for silver, for instance as a wood preservative, are also helping stoke demand after many years of the metal being held hostage to a declining photography market.
Winmill's top silver pick is Pan American Silver Corporation (PAAS) due to their "quality management team" and the potentially for margin improvement.
His other favorite stock right now is mining giant Freeport-McMoRan Copper & Gold (FCX).
"Freeport is a terrific company trading at seven times cash flow," says Winmill. "And it's very leveraged to copper prices, which have been rising due to infrastructure needs in developing markets."
The commodity boom has not been the only factor driving mining shares higher: real and potential M&A activity in the industry has boosted stocks as well. Aside from the battle royale taking place over Rio Tinto (RTP), Winmill sees a number of potential hookups on the horizon.
"Canadian-based Metallica Resources (MRB) has an interest in a huge copper deposit in South America called El Morro. The project is a joint venture with Xstrata," says Winmill. "Once the mine starts yielding fruit, then Xstrata will probably buy out Metallica to control the whole enterprise."
Similarly, Winmill believes Rio Tinto could purchase the remaining 80% of Northern Dynasty Minerals (NAK) that it does not already own. Northern Dynasty is hoping for a big strike from its copper-gold-molybdenum project in southwestern Alaska.
If prices remain this high, however, don't expect to see that gold hanging around people's necks or wrapped around their fingers. When it comes down to it, inflation comes before fashion. |
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