Has Gold Peaked? (ABX, GG, NEM, AU, GLD, GTU, DGL, IAU)

When the going gets tough, the tough go for gold. That’s historically the way it’s worked out. And the going is definitely tough now. So what about gold? Is it going up or down? Is gold the place to be right now?

Gold miners such as Barrick Gold Corp. (NYSE:ABX), Goldcorp Inc. (NYSE:GG), Newmont Mining Corp. (NYSE:NEM), and AngloGold Ashanti Ltd. (NYSE:AU) offer one way to invest in gold. There is also a mining ETF, Miners Vectors Gold Miners (NYSE:GDX). Another way to invest in gold is either by buying bullion directly or investing in bullion through a commodity ETF such as SPDR Gold Shares (NYSE:GLD) or PowerShares DB Gold (NYSE:DGL).

Commodity gold prices did pretty well last year, up 18% from December 2007, and they could rise that much again in 2009.  UBS just raised its gold target to $1,000 from $700 per ounce.

A significant driver of that rise is the Federal Reserve’s ballooning
balance sheet. If a US economic stimulus plan is passed by Congress, it
could trigger rising inflation, which always bumps up
the price of gold. There’s no getting around the fact that when
governments print more money, gold gets more valuable.

But virtually everyone agrees that the economic cycle we’re in right
now is more deflationary, not inflationary. If a deflationary period
continues, then gold will likely stay flat or drop in value. Again,
historically gold does not rise in periods of deflation.

It might be too early in the game to predict a direction for gold
prices, and that’s why the price is hovering around $900/ounce. If
inflation does become an issue, every currency in the world faces
devaluation, with the danger of a race to the bottom. In that kind of
environment, gold is really the only hedge, and the price could double.

SPDR Gold Shares, the largest gold ETF, gained about 2% in 2008. The
S&P 500 index lost about 38%. Central Gold Trust (NYSE:GTU), a
closed-end fund that is much smaller than GLD, performed even better,
gaining about 23% in 2008. PowerShares DB Gold and iShares Comex Gold
(NYSE:IAU) were essentially flat during 2008.

Among the mining stocks, Goldcorp lost the least value last year, down
14%. Barrick and Newmont were both off about 20% and AngloGold was down
about 40%. The Gold Miners ETF was off about 31% on the year. Since the
beginning of January, gold miners stocks have fallen further, but are
now recovering to where they started the year. That’s almost surely a
reaction to the sour economy and the threat of inflation and
devaluation. In operational terms, gold miners are mostly producing
less at higher costs. If gold prices drop, they could face some serious
pain.

All indications are that gold, especially the commodity, will do no
worse than stay flat. We noted the convergence of gold and platinum
prices about a week ago. Platinum
prices are up slightly since then to around $977/ounce, up from $955,
and gold is keeping pace at about $917/ounce, up from just under $900.

But platinum won’t make any big move until the economy turns around and
cars start being built again. And unless massive currency devaluation
strikes, gold will likely do no worse than hold its own. In today’s economy,
not losing is the same as winning.

Paul Ausick
February 5, 2009