Gold jumped back above $1300 per ounce Tuesday morning and « absolutely » has more upside ahead, according to Frank Holmes, CEO and CIO of U.S. Global Investors, which has about $2.6 billion of assets.
Despite all the hype about its multi-year rally, gold is actually lagging many other commodities in that it hasn’t yet eclipsed its 1980 high on an inflation-adjusted basis, Holmes says, noting the same is true of silver.
« If we were to go through those 1980 [inflation-] adjusted prices, gold would be at $2300 per ounce today, » he says, calling that a « fair » target for the metal.
There is no bubble » in gold, Holmes says, declaring « it’s a pretty easy layup that gold can double » from here over the next 5 years.
Growth in Global Money Supply: Government efforts to fight the credit crisis have included huge spending and debt guarantee programs, resulting in greater supply but less confidence in « paper money. » (On Tuesday, the Dollar Index fell to its lowest level since early February as weak U.S. economic data point to more efforts by the Fed to « reflate » the economy via quantitative easing.)
Emerging Middle Class: The big difference between gold’s current run and the bull market of the 1970’s is the « economic footprint » of emerging market economies, most notably India and China, Holmes says. « Forty percent of the world’s population believe in gold and give gold as gifts » — and have the money to buy them in increasing numbers.
The Big Dumb Money: « All the pension funds, all the endowment [funds] aren’t running into gold…yet, » Holmes says, noting those investors « piled into » tech in 2000 and private equity funds in 2006. Meanwhile, European Central Banks have dramatically slowed their gold sales and could become buyers in the years ahead.
Alchemy vs. Reality: Gold skeptics often note that almost every ounce of gold ever mined remains in existence. That may be true, but Holmes says new supply is on the wane, suggesting it’s « easier to invent a new technology » than find a 10 million ounce deposit. And if you were to discover such a bonanza, you’d have to incur huge infrastructure costs and meet rising regulatory hurdles to get the ‘yellow metal’ out of the ground.
Of course, you should question anything that looks like a « can’t lose » investment – and bulls say gold wins whether the economy is hit by deflation or inflation. But gold has defied its skeptics for a decade and shows no sign of letting up now.
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