Why the Gold Bubble Will Peak at $2,000 in 2010

by MARTIN HUTCHINSON, Contributing Editor, Money Morning

Gold surged over 60% in 2009, hitting new highs practically every week.

But, who cares?

We haven’t seen anything yet. This is just the beginning of one of the biggest gold rallies in history.

Gold will easily hit $2,000 this year. That’s a 73% gain from current levels.

But, make no mistake… Like any other bubble, this one will also eventually pop. So the time to get into gold is now.

It’s going to be a wild ride. So hang on and get ready to make a fortune on gold in 2010.

Gold’s Only Halfway to Its True High

As gold continues to shatter new highs, analysts and pundits have started to wonder if gold is peaking. But the reality is that gold has barely gotten going.

Its 1980 peak of $875 is equivalent to $2,400 per ounce today – more than double the current price. And there’s nothing holding gold back from hitting those numbers.

The Federal Reserve’s loose monetary policy has put the dollar under duress. The central bank has pumped more than $2 trillion into the U.S. economy since the financial crisis began over two years ago. It lowered the benchmark Federal Funds rate to a record low 0%-0.25% range and it has stepped up purchases of U.S. Treasuries and mortgage-backed securities.

As a result, the dollar tumbled about 20% against the euro in the past year. The Dollar Index – which measures the greenback against the euro and five other currencies – fell to a 15-month low earlier this month.

With the dollar in freefall, central banks and hedge funds have sought shelter in hard assets, particularly gold.

"Everything is pointing to the price of gold going higher," said Mike Sander, an investment advisor at Sander Capital Advisors.

Global Demand Will Push Gold to $2,000

One catalyst of gold’s rally happened in early December when the International Monetary Fund revealed that it sold 200 metric tons of gold to the Reserve Bank of India (RBI) from October 19 to 30. This purchase was equivalent to 8% of the world’s annual mine production and doubles India’s gold holdings.

Analysts believe India’s highly publicized purchase will spawn a chain reaction in which other countries and investors ramp up their gold purchases.

"This is a landmark trade," said Jonathan Spall, a director at Barclays Capital, told the Financial Times. "Central banks are conservative institutions and India’s move is a sign for other central banks and sovereign wealth funds that were contemplating buying gold."

And, with 203.3 metric tons still on sale at the IMF, don’t be surprised if China decides to bulk up on gold too. China, the world’s sixth-largest holder of gold, has increased its reserves by 76% since 2003.

It’s clear that worldwide demand for gold is clearly on the upswing. However, just as that is happening, supply and production for the yellow metal are falling.

Annual worldwide mine production of gold has decreased by nearly 8% since 2001, even as the price of gold has tripled.

Meanwhile, investment demand for gold remains strong, surging 46% in the second quarter of 2009 over a year ago, according to the World Gold Council.

What’s more, a number of the larger hedge funds are beginning to invest in physical commodities, instead of futures. They’re worried that the U.S. government will put position limits on futures. This is a big deal because this further limits the supply of gold and other commodities.

In short, everything is working together to create a major bull market for gold.

When Will the Bubble Pop?

Consider the amount of money sloshing around the world right now – China’s $2.2 trillion in reserves, India’s $285 billion in reserves, all of the money in central banks throughout the Middle East. If all the serious money charges into gold and gold really gets going, you’ll see a tremendous spike in prices.

But, everyone who says that gold will hit $2,000 in five years is wrong. It will be back down in 5 years. If it’s going to $2,000 – and almost every analyst thinks it will – it will get there in 2010.

Everything will turn around when central banks start taking monetary policy seriously, and they won’t do that in a hurry. They won’t turn off the money taps until consumer inflation rises. But when inflation does rise, the central banks will react quickly and forcefully – driving up interest rates dramatically. And, suddenly, gold won’t seem so attractive anymore.

Gold’s bull run is a bubble, just like all the other bubbles. Except this is more of a bang than a bubble, because it’s taking place so quickly. So, keep an eye on inflation and those central banks and be prepared to get out of the bubble before it pops.

How to Profit from the Gold Bubble

The time to take advantage of gold’s historic rise is now… before prices come tumbling back down. Here are four ways to make a killing on the gold rush:

Market Vectors Gold Miners ETF (NYSE: GDX): Gold miners benefit disproportionately from a rise in the price of gold, because their production costs are fixed. This means that miners are a more-leveraged way to play gold than the metal itself, particularly since surging speculative demand can increase mining companies’ Price/Earnings (P/E) ratios.

Barrick Gold Corp. (NYSE: ABX): Barrick is the largest and financially strongest gold producer, with a market capitalization of $43 billion, reserves of 124.6 million ounces of gold (plus copper and silver), and operations in North America, South America, Australasia and Africa.

Yamana Gold Inc. (NYSE : AUY): A growing gold producer with a $6.8 billion market capitalization that made an unexpectedly good profit in the fourth quarter of 2008, Yamana is expanding both production and reserves (currently 19.4 million ounces) with operations in Canada and Latin America. Its expansion magnifies the likely potential benefit from an increase in gold prices.

Invest in Gold-backed Dollars: Did you know that you can turn your drooping dollars into Pure 24-Karat Gold? This can multiply your money each time gold rises. Use this gold like regular currency and potentially double your purchasing power in the next 6-9 months. "Gold dollars" are the future of money – and those who start using them now could see the payoff long before the mainstream catches on.

Article kindly supplied by Money Morning. You can find the original article here.

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