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| Brought to you by The Oxford Club | Saturday, February 27, 2016 |
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Why Gold Is Locked and Loaded for a Gangbuster Rally
 Gold is enjoying a gangbuster rally.
And governments around the world are taking steps that will light the fuse on gold prices, sending them much higher.
I'm talking about negative interest rates.
Big players like Japan, Switzerland, Denmark, Sweden and many European Central Bank members now have negative rates.
Why are governments doing this? Well, they're trying to breathe life into economies with a lot of slack. And they're trying to give people and businesses a reason to take money out of the bank and put it to work in the economy.
And that's good for gold.
Here's why. Let's say you put a million dollars in an account with a - 2% yield. By the end of the year, you've lost $20,000 - just by keeping your money in the bank.
One of the arguments against gold is that it doesn't pay interest. Well, nowadays, neither do some big central banks. And that takes a lot of pressure off of gold.
What's more, the negative interest rate trend seems to be gathering steam. About one-fourth of the world has negative interest on central bank deposits or short-term - up to two years - government debt.
So could the U.S. go to negative interest rates? It's not likely. In fact, there's a 41% chance that the U.S. Federal Reserve will raise interest rates this year.
Then again, an interest rate hike seemed a near certainty in early January. At the time, Goldman Sachs and others said they expected three interest rate hikes this year. That opinion sure seems to be getting lonely.
You can see where this is leading, can't you?
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If central banks move into a broad negative interest rate environment, then good ol' gold becomes akin to a high-yield asset.
And then you can add in all the other reasons to own gold.
- It offers safe harbor in an increasingly frightening world.
- The World Gold Council reports that we've hit peak gold production. Supply fell 4% year over year in 2015. What's more, global gold supply fell 10% in the fourth quarter. So the decline in supply is accelerating.
- Demand remains strong. And here's the interesting thing: Exchange-traded funds that hold physical gold were a source of supply for the market. That is, they sold gold into the market for three straight years. So far this year, ETFs have bought gold. Heck, they've bought more in less than two months than they sold in all of last year.
And that trend is getting stronger. Last week, assets in exchange-traded products surged 1.6%, climbing to 1,640.81 metric tons. That was the biggest one-day jump since May 2010!
I don't think it will be the last big day. Investors are waking up to the potential in gold.
Gold still has a lot of work to do if it wants to convince the herd that it will stay strong. That's fine with me. That means there are still plenty of bargains - despite the ongoing rally in precious metals and miners.
As for me, I'm going to interview precious miners, developers and explorers to see what kinds of opportunities there are.
For example, I just did an interview with the co-founder of Exeter Resource Corp. (NYSE: XRA). It's not a miner yet. Instead, it is developing a project with a lot of potential in Chile.
(Click on image above to watch interview.)
This is not a recommendation. I like Exeter and its management. But it's not a gold producer.
The amazing thing about this beaten-down market is you can buy gold producers for close to book value. [Editorial Note: Sean recently wrote a two-part series for Investment U on what makes a good junior miner. It's a must-read for investors looking to invest in gold producers. Click here for Part 1 and here for Part 2.] Gold producers are less risky than developers, and select miners are real bargains now.
In January, I gave you the scoop on why gold was poised for greatness this year. I even told you about three producing gold miners priced like diamonds in the dustbin. Those miners, by the way, are up 33%, 54% and 84% since I talked about them.
Are they done? Ha! I think a second wind is coming. And I wonder how high select gold miners will go when gold really takes off.
Good investing,
Sean
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