They're called stock brokerages because they trade in stocks.

Which is what makes the recent prediction by Merrill Lynch all the more interesting.

"We're definitely in a bull market for gold," admitted Richard Davis, a Merrill Lynch fund manager. He went on to predict that gold's upward trend could last for some years to come.

The funny thing is, Merrill Lynch isn't alone. Other stock brokerages have jumped into the gold camp, too. No less than Morgan Stanley's Chief Investment Officer, Simon Brewer, advised buying gold as a hedge against dollar weakness and U.S. deficits. At the same time he called equities "overvalued."

"Some of the sharpest minds on Wall Street are betting you'll make more money in metals than Microsoft the next few years. The new bull market is in stuff, not stocks," wrote John Waggoner in the USA Today article, "Real assets create real riches."

"We're talking about land, oil and gold," he went on to write, "the commodities that once made John Jacob Astor, John D. Rockefeller and the Hunt brothers very rich men."

You heard right. The buzz in early 2005 is about gold and other commodities. Not stocks and bonds. And there's good reason for that. Since 1999, the Commodities Research Bureau Index has been up 36%, even as gold itself enjoyed a 54.3% rise.

And stocks? Well…stocks have headed in the opposite direction. The Dow is down 7.1% over the past five years. Small wonder that, starting at the very top of the investment food chain, money has been flowing into gold and commodities of late.

Seinfeld might have called this the Bizarro investment world. That's where everything is the opposite of what you'd expect.

Like a Merrill Lynch man cheering for gold.

"If you believe the dollar will weaken further, as many people do when they have a look at the big trade and budget deficits in the States, the gold price might do quite well," Davis observed.

He also stressed that gold's fortunes are not dependent on the weak dollar. "Gold is not exclusively linked to the US currency markets and, while other factors sometimes fail to make the headlines, they are no less important for the long-term outlook for gold."

Which, bizarre or not, sounds like strong gold support from a leading stock brokerage.

Historically, fans of stocks have not been fans of gold. In fact, gold and stocks have more closely resembled oil and water.

There's been this strange disdain "paper" investors have seemingly held for the precious metal. Who knows why? Maybe stocks seemed sexier. Or maybe it's had something to do with the prudence and discipline inherent in a gold investment.

Regardless of the reason, fewer folks are looking down their nose at gold now. And with stocks down 7.1% and gold up 54.3% since 1999, brokerages have been scrambling to get their collective feet in the door. Merrill Lynch, for one, has done that with its anomalous "Natural Resources Team."

Even so, with Bill Gates very publicly shorting the dollar in February-joining Warren Buffett in his anything-but-the-dollar investment strategy-the time for fence sitting appears to be running out for investors.

But you can still beat the clock. History-at least the history of the last long-term gold bull market-is on your side. In the late 70s, when gold crossed into the then record $400 territory, skeptical investors didn't realize that gold still had another $400 to go.

The question is, will history repeat itself?

In today's Bizarro World, that only seems destined to happen.

********

It's a relationship as old as human beings. Supply versus demand. What you want versus what's available. And at what price. In the case of gold, it's a hot issue in 2005.

That's because gold demand is high and heading higher. It jumped 7 percent in 2004 alone. And with China, India, the Muslim nations and investors all diving in, demand should spiral higher this year.

Yet the precious metal just suffered the sharpest fall in mine production in 60 years.

Not since the 40s has gold production fallen so far so fast. Specifically, the gold supply slipped 13.3 percent in 2004.

There's more. That drop is entirely consistent with a trend already in place. That's the declining gold production trend of the last four years.

Gold analyst Eric Hommelberg has an answer:

"The reason for this trend was a lack of exploration during the 1997-2002 period. During this period, exploration budgets were cut by 67% due to the fact that these programs weren't profitable with gold below $350 an ounce. No exploration means no new gold deposits! It's simple as that!"

Hard to say it any better. There just haven't been many new gold finds lately. And that will have huge consequences over the next seven to ten years. Maybe longer.

"Big mining companies need to spend more on exploration, or else, at current annual production rates, reserves will be depleted in 10 years. We're not currently funding exploration at a level required to replace reserves," said Alex Davidson, VP of Exploration at Barrick Gold, one of the world's largest gold mining operations.

Then there's this perspective: "The way I like to think of it is the gold industry is in overdraft. It's been relying very much on discoveries that were made many, many years ago and it is not replacing the reserves it mines every year," warned commodities analyst, Trevor Steel, of Baker Steel Capital Managers.

Others share that view. One of the world's foremost precious metals consultants, GFMS, expects mine supply to peak in 2005-at levels only slightly higher than those seen in 2004-then decline by about 30 tons per year through 2010.

Complicating matters is the fact that gold mining is simply getting more expensive.

Mining costs rose from $378.3 million in the fourth quarter of 2003 to $488.9 million in the 2004 fourth quarter. That's a whopping 29.2 percent jump due to the higher costs of oil, steel and other vital materials.

With the price of oil at $57 a barrel and rising, so will these energy-related gold production costs.

And so will supply problems.

These supply issues take on a whole new light when you look at the gold demand of just one country: China.

While the Chinese people recently got permission to own gold, the distribution of the precious metal throughout the nation has been archaic at best. Recently, though, the Bank of China was given "state permission" to sell gold throughout the nation. The nation's other three top banks are expected to garner approval soon, too.

Once their distribution machinery is in place-and that now includes Internet sales, too-the fulfillment of pent-up Chinese demand will be at hand. As it is, gold often sells out in hours wherever it shows up there. One Chinese department store managed to get a bunch of gold bars in...and they were gone in seven hours!

Should overall demand heat up as predicted, don't expect gold production to suddenly hit "turbo" and keep pace. "If gold were $1,000 an ounce, it would still take four to seven years to open a mine," observed Pierre Lassonde, president of Newmont, the world's largest gold producer.

All of which makes a gold investment seem like a particularly brilliant move right now. Especially since procrastination has absolutely no bearing on declining supply and rising demand.

3 May 2005

Kevin DeMeritt has been helping investors add protection and profits to their portfolios for 22 years now. Check out the latest gold, silver and platinum prices-and email-us at Lear Financial www.goldcentral.com . And call Lear at 1-800-965-0580 for all the ways to diversify your portfolio with precious metals.