The US government has responded to the worst financial crisis since the Great Depression with a whopping $ 13.5 trillion in promised or potential outlays. Meanwhile, rising unemployment and falling corporate profits are hurting US Treasury tax revenues.
The creditworthiness of the US government is generating concern and its triple A credit rating is something that cannot be taken for granted. In this context, it is not surprising that the appetite of foreign governments and investors for dollar-denominated investments has diminished.
The dollar’s position as the world’s de facto reserve currency is deteriorating. Nations like China are actively seeking to diversify their foreign exchange reserves by moving away from the dollar and showing a taste for gold.
The combination of liquidity flowing through the US economy and a sunken dollar fuels inflation. And investors increasingly perceive inflation as a threat and seek a safe haven in gold.
Gold price outlook
Gold is once again approaching the psychologically important mark of $ 1,000 per ounce. The rallies in the price of gold have peaked in the range of $ 900-1,000 per ounce three times since the beginning of 2008. I believe that gold will break the four-figure mark in 2009 and move to surpass its highs of 2008 Given the state of the US economy and the monumental challenges ahead, the $ 1,000 per ounce figure can become a support or bottom for a long time.
Investment Recommendations
Here are three ways conservative and moderately risk-tolerant investors can gain exposure to gold.
1. Own shares in SDPR Gold (GLD).
2. Owning shares in mutual funds or ETFs such as Fidelity Select Gold (FSAGX), USAA Precious Metals and Minerals (USAGX) or Market vectors Gold Miners ETF (GDX).
3. Owning relatively well-capitalized gold miner stocks with increasing profits. Newmont Mining (NEM) fits in quite well in this regard. The company has a solid balance sheet. Newmont’s operating margin will expand this year as production from its Boddington mine in Australia begins in mid-2009.