At a conference in Brisbane over the 17th & 18th of June I gave a presentation to an audience and said that we are looking at very much higher gold prices in the next few years, and thought that we'd be able to achieve a price of about US$5,000/oz in that time period.
Now, that's not a such a strange number compared to where we are today, because gold prices in almost all currencies are making new all time highs; we're certainly seeing that in US dollars in the last week, we've certainly seen that in terms of Euros, in British Pounds, in Swiss Francs, most of the OECD currencies. The commodities currencies, like the Australian dollar, the Brazilian Real, and one or two other commodities currencies, have actually been a little different in their character, and consequently they have not yet made new all time highs in 2010, as the OECD currencies generally have.
WE've got to look at that long term issue that I mentioned and if you think about where prices are in real terms; the gold price peaked on the 21st January 1980 at over $875/oz and there has been a lot of cumulative inflation since that period, so in real terms where we are today compared with that $875 in today is only about $550/oz, so even though we've got a bigger number, in real terms we're still well below where we were 30 years ago
The other thing to keep in mind too, is that the conditions today are far worse in terms of the background and intrinsic value of gold compared to where it was in those very strong inflationary period in the late 70's/early 80s
World gold production peaked in 2001, that's almost a decade ago, and response to the higher gold price has been remarkably muted; the main reason for that is the decline in gold production from South Africa and we've seen growth from China. China is now the world's largest producer, eclipsing Australia and the United States; Peru is also becoming an important player as we go forward.
But the demand for gold is rising, investment demand is much, much higher, it's about three times the level is was even three years ago and the central banks are no longer selling their gold, they release how important it is to their monetary structure. Consequently the supply of gold is no increasing at all, and the demand, as I mentioned, is rising, with very strong demands for gold coins and gold ingots.
Now when we look at gold stocks, they've really underperformed over the last few months with the rise in the gold price, but the fascinating thing that I've found is that gold stocks have really gone sideways and we if we look at the US indices going back to that late 70s the gold stocks have really gone sideways for 30years and what we're looking to see is a breakout on to the upside, reflecting that higher gold price. But all the indicators are that gold stocks are outperforming the general market, the volumes are picking up in gold stocks against the rest of the market and I think that we're going to see quite a substantial outperformance by the gold sector and other commodities as we go through the next couple of years. I think that the experience that we saw from 2000 with the peak in the US equity market with its declined into 2003, in that period we saw gold stocks move up quite substantially, and whatever happens to the US equity markets, we going to find that these gold stocks are going to outperform.
So, there's many opportunities coming through now, the Australian market, of course, has been hit with this resource rent tax issue, something that I think is quite bizarre in concept and will most definitely not be accepted by any party in its current form and will probably just be forgotten about after the next election.
But the opportunities in the Australian share market are quite reasonable.
Have a look at the recommendations that we have. As far as our portfolio is concerned people must have the larger cap stocks, the Newcrests (Newcrest Mining Ltd; ASX:NCM) and the Lihir's (Lihir Gold Ltd; ASX:LGL), and you must have a portfolio of six or seven stocks at least, and when you get down to the smaller ones you have got to have a good spread , because the risk in those companies is still quite great, although the rewards are as we go through will be substantial.