Gold fever returns

Gold fever is again sweeping the Canadian markets. Vancouver underwriters are suddenly getting action and new mining issues are rushing to market. People are sending me blow-by-blow reports of new drilling ventures in northern Ontario, wanting to know if they should invest.

No wonder folks are excited. Gold is about the only place we’re seeing any action on the markets these days. The hot money is flowing in.

Reports fuel frenzy
The frenzy is fuelled by media reports and by life-long gold bugs. They’re emerging to claim credit for their prescience after years of predicting a big rally in bullion was just around the corner.

The Globe and Mail Report on Business recently featured a lengthy interview with U.S. newsletter writer and gold maven Jim Dines. He predicted gold is heading for $1,000 an ounce (that’s U.S. dollars, of course) and said there are fortunes to be made in the yellow metal in the months ahead.

All sounds familiar
Maybee’s right. But I’m sceptical. I’ve heard this song many times before.

Back in the 1980s, the gold bugs were offering incontrovertible evidence that bullion would soar to $2,000 an ounce. After the metal slumped, they scaled back their forecasts. But a best-selling book published in the 1990s predicted $700 an ounce by the turn of the century at a time when bullion was in the $250 range.

That didn’t happen either.

Certainly, $1,000 an ounce is possible. Anything is possible. But to believe a prediction like that, you have to also believe in a worst-case scenario on several fronts.

Depends on events
Gold will go to $1,000 an ounce if the following events (or similar) occur.

    1) India and Pakistan engage in a nuclear exchange.

    2) A series of major terrorist attacks occur in the U.S.

    3) One or more big U.S. banks collapse.

Any one of those events would certainly send gold higher. But I think it would take all three to propel it to $1,000. Frankly, I don’t believe that will happen. In fact, I don’t believe that any of the three will occur, although that may be my natural optimism (or wishful thinking) showing through.

Next page: Aggressive investing advice

Aggressive investing advice
But if you’re of a contrary view, or simply want a little exposure to a hot commodity, here’s my advice.

  •  First, stocks are a better bet than bullion. They have more leverage and you can trade in and out of them quickly and easily.

  • Second, steer clear of juniors with high hopes but no production. A couple will make it big and those with a stake will be millionaires. But the overwhelming majority will go nowhere and investors will lose all. Ignore hype. Focus on reality.

  • Third, if you want to invest in individual stocks, choose companies with proven reserves and earnings.
  • Big names like Barrick Gold (TSX,NYSE:ABX) don’t have the explosive upside potential of the juniors, but neither do they have the bottomless pit downside.

    Barrick makes a nice profit (US$232 million for the 12 months to March 31), pays a small dividend (US$0.22 annually) and is trading a bit below its recent highs. It’s a way to obtain gold exposure without big risk.

    • Finally, for those who want more upside potential and are prepared to accept the risks that go with it, consider iUnits Gold (TSX:XGD).

    Gold world view
    These exchange-traded funds replicate the S&P/TSX Gold Sub-Index. This won’t give you exposure to the junior sector of the market, but you’ll add some other major producers (e.g. Placer Dome) as well as some rapidly rising mid-cap issues like Kinross to your portfolio.

    Just don’t go overboard. Gold has already had a great run. If calm returns to the Middle East and terrorist warnings diminish, look for the bullion price to drop and gold share values to fall. That’s the way things are in the topsy-turvy gold world.

    Good is bad. Bad is good.

    Adapted from an article that originally appeared in the Internet Wealth Builder.