Saturday, October 9, 2010

John Kaiser: Best Leverage in Ounces-in-the-Ground Plays

The Gold Report: John, you were recently at a mining conference in Toronto where you told the audience you could see gold spiraling well into the thousands/oz. without worldwide financial Armageddon. Other gold pundits think such prices can be attained only with global financial ruin. Tell us how gold investors can have their cake and eat it too.

John Kaiser: I regard gold as a special asset class, whose specialness is derived from the fact that gold is very rare, hard to bring above ground and generally useless due to its high cost, unlike silver, which is more abundant than cheap and gets fabricated into all sorts of industrial applications. Gold would be a wonderful conductor for electronics, too, but it's just too expensive. We have just over 5 billion oz. (Boz.) scattered around the world in safes, vaults and jewelry boxes not doing much at all.

Because gold has limited utility, its price is irrelevant to ongoing economic activity. As a comparison, if oil shoots to $500/barrel that means that your paycheck would allow you to drive just one-fifth the distance it allows you to drive now. Such a move in oil would have drastic implications for the global economy. But if gold shoots to $5,000, what happens? Well, the gold stays in my teeth. Jewelry demand goes down even more, but nobody makes any decisions to substitute out of gold because it really isn't being used for much. In other words, it really should not affect the economy.

TGR: Then why are people buying gold? (more)

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