The Persistence of the Gold Bugs

Last year gold fell 28% against the U.S. dollar, ending a prodigious decade-long rise. Gold aficionados believe this is a temporary blip in a continuing upward trend. They may be encouraged by a 3% rise this month.

Thus Canadian manager Eric Sprott, a leading proponent of gold investing, argues that the 2013 decline happened because Western central banks manipulated the gold market, that in 2014 shortages will emerge and the metal will gain a lot.

He certainly puts his money where his mouth is, building substantial positions in a slew of gold producers, undeterred by steep losses and big redemptions from his funds.

His holdings range from American Bonanza Gold to the Latin American Solitario Exploration & Royalty Corp. and from Golden Queen Mining Co. in California to Miranda Gold in Nevada., besides various Canadian companies, some operating mines outside Canada like Golden Goliath Resources in Mexico.

Asia is key to Mr. Sprott’s rosy gold market outlook. His analysis of supply and demand predicts shortages because of strong demand from China and India—despite the Indian government’s effort to restrict gold purchases. But there is a lot of uncertainty about these economies.

Other researchers use different models and come to opposite conclusions. Mark Hulbert reports a study the shows an inverse relationship between interest rates and the price of gold. Given that rates are likely to continue rising as the Federal Reserve tapers off its bond purchases, the forecast for gold is negative.

There is one recommendation for undiminished gold exuberance. The contrarians who bought gold at the end of 1999 were right— that was the place to be as the stock bubble burst. The contrarians who bought gold in 2007 also made the correct call.

No wonder many large investors continue to carry some gold, often in the form of an exchange traded fund, in their portfolio. It remains a hedge against financial disaster.


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