ECB program Can Pave The Way To $5,000 Gold Price

Last month I was at a foreign direct investment conference in Sharjah and bumped into an old friend, Mishal Kanoo, whom I had not seen for a few years.

He is now the boss of his family’s multinational corporation and listed as one of the world’s 20 richest Arabs. He immediately asked me if I thought gold was still going to US$5,000 an ounce, a reference to the subtitle of my 2010 book, The Road to $5,000 Gold.

Yes was my immediate reaction. Money printing is out of control. Just look at the $1.2 trillion European Central Bank quantitative easing programme that started this week. Gold is a currency that nobody can print. Alchemists never found a way to create gold. Central bankers expand the supply of paper money for a living.

Of course, it is true that my prediction that gold would one day reach $5,000 an ounce has taken rather longer to come true than I expected when that book came out five years ago. The gold price has also been through a long correction phase since October 2011 that Elliott wave theorists believe has one final dip to come before a serious spike upwards.

It is not hard to see how that final downshift in the gold price may happen. The start of the ECB money printing was greeted by a slump in US stocks and the gold price. This sell-off could easily get a lot worse, given the volatility we have seen in financial markets over the past six months.

But I still believe the safe bet is that gold then rebounds first and comes out on top. That is what happened in the global financial crisis. The only asset class to outperform gold in the recovery from that massive global sell-off was silver.

You would have needed nerves of steel to buy silver when it plunged to $8.50 an ounce and to hold until it topped out close to $50 in April 2011. Still, if you wanted to make a 500 per cent profit in two years that was a simple and uncomplicated way to do it.

If it is no different this time then shares in gold and silver producers, and the junior exploration companies that own concessions where future deposits may be discovered, will also be excellent buys. Another old friend, Marc Faber, whose 2002 book Tomorrow’s Gold was stunningly accurate in predicting the rise of gold in the noughties, said last month that this was exactly the moment to be buying shares in the junior explorers.

Again, like buying silver for $8.50 in the middle of the global financial crisis, you would need to be feeling very brave. Many of the junior explorers crashed by 80 to 90 per cent in value last year and their charts only hit the bottom in December, according to technical analysts. If you want to spread your risk, then the GDXJ exchange-traded fund invests in a basket of these stocks so that you don’t have to pick them yourself.

Buying the right junior gold exploration company in a bull market for gold will provide the maximum leverage to the gold price and vice versa. So if the price of gold rises four times to $5,000 an ounce, then 20 to 50 times is possible for the best-performing junior miners. Spot the life-changing speculation, if it pays off.

Silver is also very likely to outperform the gold price because it is bought as a substitute for gold and global supplies are tighter. Pure silver producers and explorers are also less numerous than gold companies, and so their share prices should also offer higher leverage.

It’s notable that since the start of the year many smaller stocks in the precious-metal sector have done outstandingly well as the bottoming of the technical chart was widely followed. But to get some really exciting performance in this sector of the stock market then we need to see the price of gold heading up and not down.

Mishal and I joked that $5,000 would be a good time for my wife to sell the gold charm bracelet he gave her for our wedding, although perhaps she might be better advised to sell it now and buy the GDXJ ETF instead.

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