By Jeff Clark
Casey's BIG GOLD

CPM Group recently released their 2011 Gold Yearbook, an invaluable resource for us gold analysts. Mostly a reference book, even a gold enthusiast might find it dry reading. But I loved it, and as I studied it on a plane, I kept finding data that made me perk up.

To have a little fun with it, I thought I’d summarize what I read in the form of a quiz. See how many you can get correct. Regardless of your score, I’m sure you’ll agree with the ramifications each point makes for the gold market.

I’ll start off easy…

1)      The main driver behind rising gold prices over the past decade is:

a)      Increased jewelry demand in India
b)      Greater industrial uses of the metal
c)       Investment demand

Worldwide investment demand for gold totaled 44 million ounces in 2010. Because of the growing demand by investors, prices have been forced upward.

→Five exchanges began trading gold contracts for the first time in 2010, and three more introduced mini contracts, collectively the largest number launched since the early ‘80s. There are now 24 gold vending machines in seven countries, with three more countries adding machines this year. Households in developing countries are now moving away from gold jewelry and buying coins and bars for their savings. I could go on, but suffice it to say that investment demand will continue to be very strong.

2)      True or false: recovery from gold scrap was lower in 2010 than 2009.

Scrap rose three consecutive years in a row – until last year. Gold supply from scrap fell 2.1%, to 42.2 million ounces.

→This is significant because gold prices were higher, which would normally increase the amount of scrap coming to market. One of the primary reasons scrap dropped is because investors are holding on to their metal, reportedly because they believe prices are headed higher. Isn’t that one reason you’re holding on to your bullion?

3)      There are many reasons investors have been buying gold over the past 10 years, but what is the #1 reason?

a)      Safe-haven asset
b)      Gold coins and bars have become more intricate, widespread, and beautiful
c)       Supply and demand imbalance

Global fears increasingly led investors to purchase large volumes of gold in 2010 for safe-haven purposes, despite record price levels.

→High levels of investment buying are expected to continue in 2011 because virtually none of the economic, political, and monetary concerns have been resolved.

If you got all three answers correct, you’re an investor who understands the basic reasons for owning gold and that those reasons are still in play.

Now let’s step it up a little…

4)      Gold represented what percent of global financial assets at the end of 2010?

a)      3.1%
b)      0.7%
c)       1.6%
d)      2.4%

The estimated value of investor gold holdings stood at $1.5 trillion at the end of last year, about 0.7% of global financial assets.

→While up nine years in a row and triple what it represented in 2001, gold is still a miniscule portion of the world’s private wealth. It represented 2.8% of global assets in 1980, four times what it does today.

5)      How many central banks increased their gold holdings in 2010?

a)        9
b)      12
c)      15
d)      19

Russia, Thailand, Belarus, Bangladesh, Venezuela, Tajikistan, Ukraine, Jordan, Philippines, South Africa, Sri Lanka, Germany, Kazakhstan, Mexico, Greece, Pakistan, Belgium, Czech Republic, and Malta = 19. Central banks as a group are expected to continue to be net buyers of the metal for the foreseeable future.

→It’s interesting that most purchases were from developing countries, unsurprising when you consider they’ve accumulated over $5 trillion in foreign exchange reserves just since 2002.

6)       Compared to 2009,U.S. Mint gold coin sales in 2010 were:

a)      Down 12%
b)      Up 8%
c)       Up 5%
d)      Up 3%

The U.S. Mint sold 1.43 million ounces last year, down 12% from the 1.62 million ounces sold in 2009. You might think this is negative until you realize that global coin sales rose 21% last year, reaching 6.3 million ounces. Makes you wonder what other countries know that many North Americans don’t.

→Supply problems continue to plague the U.S. Mint, evidenced by the fact that Buffalo sales were suspended for half the year.What happens when the greater population begins to clamor to buy gold? Bottleneck, meet desperation.

7)      CPM estimates that the fiscal and monetary imbalances, especially in developed countries, could take how long to resolve? 

a)      1 year
b)      Decades
c)       5 years
d)      2 years

Rigid social contracts are so deeply ingrained, especially in the developed world, that it will take decades to resolve the monetary imbalances.

→This sobering fact means gold will likely be in a bull market for many years to come. There are very few options to deal with the overwhelming debt burden in most of these countries: raise taxes, cut spending, increase growth, or print money. Guess which one is most likely? Inflation from currency dilution is baked in the cake and will spur further gold demand and light a fire under the price.

If you got these four questions correct, I think it means you’re an astute investor who doesn’t worry about day-to-day price fluctuations and instead focuses on owning enough ounces to protect your assets from the huge and intractable fiscal problems that still have to be faced.

Now here are some questions for those of you who love gold stocks…

8)      What was the industry-average cash cost to produce an ounce of gold last year?

a)      $509
b)      $498
c)       $544
d)      $474

Cash costs have tripled since 2002 and rang in at $544 last year. They will certainly be higher again this year.

→In spite of higher costs for the producers, margins actually rose due to higher gold prices. Margins in 2010 averaged $680, and were only $114 as recently as 2002.

We’ve got some of the most profitable companies in BIG GOLD, along with a number of producers that have big growth coming online over the next one and two years. Buy these stocks before that growth happens; if you shell out the bargain basement price of $79 now, I think your portfolio will be very happy when it comes time to renew.

9)      The average grade of gold mined on a worldwide basis last year was how much?

a)      5.11 grams/tonne
b)      3.54 grams/tonne
c)       2.96 grams/tonne
d)      1.83 grams/tonne

The second lowest level on record – 1.83 grams per tonne – occurred in 2010. While not entirely negative since higher gold prices allow producers to go after lower-grade deposits, this leads to higher costs for both discovery and production. It is undoubtedly true, though, that one of the main reasons grades are lower is because the easy fruit has been picked in many regions around the world.

→This is bullish for those explorers that can find and develop higher-grade deposits and is where much of our speculative dollars should be focused. Our mining exploration advisory International Speculator tells you which companies are the best of the best, outperforming the S&P by 8.4 times last year. So if you’re not reading the International Speculator yet, you’re missing out on some spectacular profits.

10)   The most popular region for exploration spending is where?

a)      Latin America
b)      Canada
c)       Nevada
d)      China

Roughly 25% of all global exploration money is devoted to Latin America. The biggest beneficiaries are Peru, Mexico, Brazil, Chile, and Argentina.

If you’re investing in gold and silver explorers, make sure you have exposure to this region, as odds are high there will be a number of major discoveries made here. If you got these three questions correct, you’re well in touch with the gold stock market, and I hope you’re taking advantage of the picks we offer in BIG GOLD and International Speculator.

This data clarifies and confirms why many investors own gold and continue buying it. It paints a decidedly bullish picture for the metal, in spite of record price levels. Monetary issues are far from over, won’t be easily resolved, and will take years to play out. Banks continue buying, and investors aren’t selling. The U.S. Mint can’t keep up with demand, and yet gold is underowned when compared to other major asset classes. Costs are rising for the producers, but margins are rising faster for the better-run companies.

When looking at the big picture for gold, I for one draw comfort from knowing I’ve got some ounces tucked away. I hope you, too, see gold for what it is – protection against unsustainable fiscal imbalances and massive currency debasement, and a profit center for years to come.

© 2011 Casey Research

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