Monday, March 9, 2009
Gold Outperforms Whole Mining Industry
The metals mining industry is preparing itself for a protracted period of low prices as industrial demand for metals has slowed along with the world economy. Prices of copper and aluminum for example are down approximately 60% since last summer.
For several years, booming metals prices were the result of consumption in the developed world and in rapidly industrializing China. But with both undergoing an economic recession, consumption has slowed. Particularly in China, where massive government investment in infrastructure projects pushed commodities prices higher. But this has slowed during the current economic crisis.
The mining companies were hoping that government stimulus packages would prompt a quicker recovery of economic activity that would increase demand for industrial metals, but this looks like a bleak prospect for now and they aren't expecting a rise in commodity prices until late 2010.
But despite the huge drop in industrial metals prices, gold has for the most part retained its high price. It has come down from its peak of over $1000 per troy oz, but will likely rise again soon. Its resilience is due to its status as "real money" and a "safe haven". So even when industrial demand for gold declines, it retains its status as a store of value and a real medium of exchange. And as I expect the current economic situation to get worse and continue for quite some time, I know we will see greater movement of investors into gold.
I personally see low commodities prices as a blessing because it gives me an extended buying opportunity. The fundamentals of commodities in general are very strong, and if you buy now on these lows you have a definite chance to make big gains. But I will also continue buying into the gold market because despite the commodities bull market (which is not over but interrupted), I think the fundamentals of the US economy are so bad that gold's value as a safe haven is still vastly underrecognized.