Why Gold Should Be Part Of Your Stockmarket Portfolio

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Why the outlook for gold is so bullish

The starting point for the analysis of any commodity is supply and demand, and for gold the simple fact is that supply is declining and demand rising

The gold supply

World mine production began to level off in the 1990s as gold traded a wide range but remained significantly lower than previous peaks, and by 2004, production was falling at a rate of 5% p.a. according to the World Gold Council. This as yet has not changed significantly and is a long term factor because it can take almost a decade for a rise in gold prices to generate exploration and eventual exploitation of new mines.

In terms of the existing supply, much of this has come from ongoing central bank offloading of gold, and here many developed countries have now stopped both official and unofficial sales of gold. Previously, and as a result of the need to diversify, central banks carried out regular gold sales, but in some cases (see below) the reverse is happening as finance ministers see the need to protect against the inflationary consequence of fiat monetary policies that are rampant across major western economies.

Another aspect of supply that is changing is forward selling from gold producers, where output prices were traditionally locked in to protect against potential future falls in gold. This was a normal part of commodity hedging, and to some extent it might have helped keep the price down, but given the ongoing bull market, mining companies now run the risk of losing potential future profits if they hedge into rising prices. It is estimated that global gold producers have reduced forward sales by over 40%, which would result in a drop in supply of almost 1000 tonnes.gold price

Demand for gold

A big change in demand has come from central banks in China, Japan, India and Russia as a result of the need to diversify their vast US dollar reserves to some extent. The Russian central bank has hinted more than once that it plans to double its gold reserves, and the subject has regularly been mentioned by the Chinese central bank. All this is mainly as a result of the high proportion of trade-related US dollars flowing into their coffers, which has made them gold priceproportionately more reliant on the value of those dollars held.

Asset allocation and investment in gold

Back in the 1970s commodity investment was an essential part of asset allocation for diversified portfolios, but despite the long term bear market ending just after the turn of the millennium, many investors continue to shun gold stocks. The two biggest gold stocks in the world are Barrick Gold Corporation, now valued at $36bn, and Newmont Mining, worth £21bn, and the total value of the top ten gold stocks is less than $150bn. If you compare this with the current value of Exxon Mobil at $505bn and it can be seen how insignificant gold stock valuations remain given the continued potential of this sector.

M3, inflation and the gold pricegold price

With M3 money supply growing rapidly in most of the developed economies, the only outcome other than drastically higher interest rates, which looks unlikely, is a devaluation of currencies as has been the case throughout the last century. Should the dollar continue to move to lower ground as measured by the dollar index, which looks likely, further diversification into gold and other asset classes as a protection against the falling value of dollar reserves is likely to accelerate.Article Source: http://EzineArticles.com/873719gold price