Sala Kannan explains why you should buy Small-Cap Gold Stocks.

Here is a simple to way find out where the next bull market is going to be: Ask professional money managers where they are putting their own money. And that’s what I’ve been asking every fund manager I’ve met here in Africa.

Interestingly, almost all of them have said they will put their own money either in gold stocks or other small-cap commodity stocks. It’s not surprising that they all gave me the same answer. Gold prices came off a 20-year low base and went on to double in price in just five years.

Here’s why…

Small-Cap Gold Stocks: Why Gold Gained 96% Since 2001

Gold has seen a dramatic bull run since 2001. Most people think the price increase has predominantly been due to U.S. dollar weakness. Gold is the traditional safe house for investors when they see currency weakness (the U.S. dollar index has fallen 24% since 2001). But that’s not the only reason gold is up.

Let me tell you why gold is on a phenomenal rise and why the rise will continue…

Interest rates worldwide are surprisingly low. Although the United States and United Kingdom have been hiking their prime rates, historically speaking, rates are still low. That means money is cheap. Buyers of commodities can buy them at lower cost.

For international buyers like China, commodities are also cheap in dollar terms. Since the dollar has slid, major foreign gold buyers have found it quite attractive to buy dollar-denominated commodities. And China has been a major player in the commodities market, consuming 25-30% of almost every commodity. The richer the Chinese get, the more gold they will buy.

Small-Cap Gold Stocks: Why Gold Will Gain Another 26%

Individuals aren’t the only gold buyers. Central banks are buying gold like there is no tomorrow. According to Paul van Eeden, one of the world’s most respected gold analysts,

“We are witnessing a change in central bank behavior. Last year Argentina bought 42 tonnes of gold and now Russia wants to increase the gold in its reserves from 5% to 10%. The Moscow Times quoted President Vladimir Putin this week as saying he supported the central bank in paying greater attention to gold in its foreign reserves.

“During the 1990s, the gold price would drop sometimes by tens of dollars an ounce after the announcement of central bank sales, and while the actual sales had very little impact on the gold price, their effects on investor psychology were clearly evident. I suspect the same is going to be true of central bank purchases, with one exception: Given the large foreign reserves being created in countries such as China and Japan, we could see a dramatic increase in the gold price if such countries attempted to balance their reserves with gold, as Russia is contemplating.”

So the central banks at Argentina and Russia are all buying gold. China and Japan could soon follow. But here is another region that could potentially be the largest gold buyer of them all — and nobody knows about it: The Middle East.

Countries have current account surpluses. That means they have surplus cash from export revenue. As Paul Van Eeden points out, “Oil-producing nations are also seeing their foreign reserves swell given the increase in the oil price. If they, too, start adding more gold to their foreign reserves, that could also impact investor psychology and the gold price.”

The buying doesn’t stop there. $150 billion of pension and hedge fund money has gone into the commodities market in the last three years alone — something that has never happened before in the history of stock markets.

So we have a billion people in China buying more and more gold, world central banks are now net buyers of the metal and a huge influx of institutional money has come into gold. That’s the perfect formula for a meteoric rise in gold prices. And this money isn’t leaving the gold market soon; when central banks and mutual funds buy gold, they buy for the long term.

That’s why you should invest in gold stocks.

Small-Cap Gold Stocks: Why Small-Cap Gold Stocks Will Make You 50% More Than Large-Cap Gold Stocks

When gold prices rise, small-cap gold stocks rise more than their large-cap counterparts. That’s because small-cap stocks are more sensitive to moves in gold prices.

Also, small-cap gold companies are often in the early stages of exploration and prospecting. While this adds more risk, it also means they have tremendous room to grow. Besides, large miners tend to have more “marginal mines.” These are mines where production costs are high and ore grades are low. As a recent Merrill Lynch study pointed out, marginal miners are under constant threat of closing down in the wake of stronger local currencies.

That’s why when all the central banking buying starts and gold hits $700 an ounce, small-cap stocks will be the biggest gainers.

Regards,

Sala Kannan
February 10, 2006

Penny Sleuth Contributor

The Penny Sleuth also features commentary by other financial analysts, small-cap experts, investment gurus and an array of contributors from various fields and occupations. Their diverse insights and contrarian investing ideas are hand selected by the Penny Sleuth editors.

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