I am often asked: why do I invest in gold and gold stocks? There are many reasons why gold prices are rising and will continue to rise, but the simplest answer is the basics of supply and demand. In the early ’80s, Cabbage Patch dolls were selling for 100 times the retail price due to a lack of supply. This put many people off the market and angered parents at Christmas. I don’t think the company intended to increase prices with a limited-supply strategy, especially since it didn’t benefit from higher prices as a secondary market evolved. Therefore, to take advantage of the demand, the company had to increase production. I think a similar scenario is evolving in the gold patch.
From 1980 to 2001, there was very little interest in gold as it fell to as low as $255/oz. Mining companies were unable to attract investment capital to carry out new mines and projects, so gold supplies dwindled. During this same period, India and China were beginning to see the fruits of their industrialization efforts. As countries industrialized, their citizens benefited and began to move from the poor to the middle class.
There are literally billions of people in India and China. Each have cultures that encourage thrift and have a strong affinity for gold. As more move into the middle class and transfer a portion of their savings into gold, investment demand will be enormous. This will be exciting for gold investors; however, that will only be a fraction of the demand. The central banks of Russia, Argentina and South Africa have announced that they will increase their gold reserves with rumors from China and perhaps all of Asia to follow.
http://www.kitco.com/ind/Hommel/dec122005.html
Gold mining companies don’t have the luxury of the Cabbage Patch doll company, which was able to quickly ramp up production. It takes 5 to 10 years to bring a new gold mine into production. This will leave the industry short-supplied for many years to come. The investment demand alone should be enough to get you excited about investing in gold. However, there are many more reasons. The Aden Sisters got it extremely well in their last comment.
http://www.321gold.com/editorials/aden/aden062206.html
Investment demand from individuals and governments will put a huge strain on an industry that is already under-supplied. Like any investment, its price will not go directly to the
moon, but it will ebb and flow. However, until supply and demand are in balance, prices will continue to rise. An investor with a systematic approach as described in my previous article, “Dollar Cost Average for Double-Digit Returns,” will be well pleased.
No Comment