7 Reasons Gold Will Surpass $2,500 - And Inflation Isn’t One of Them

Gold’s price has quadrupled since 2000, yet this is just the beginning of a historic rise. Seven
major forces are set to push gold past $2,500 – and we’re not talking about the tired old inflation
story…By Peter Krauth Contributing Editor Money Morning

We’ve all heard that inflation drives up gold prices. When inflation is on the rise, investors buy
more gold to hedge their portfolios. And, with all the government bailouts and stimulus
packages, it’s hard to deny that inflation is coming. After all, the money supply has more than
doubled since October. Yet few people realize that inflation may be the least of the reasons why
gold prices will push higher.

Since bottoming out in 2001, gold prices have risen by nearly 300% and have twice targeted the
$1000 mark. And that’s happened in a relatively “inflation-free zone.”There are other forces at
work here. This report will show you exactly why inflation is only a small part of the gold story.
And, we’ll identify the best ways to profit from the coming gold rush.

Gold Trend #1: Gold Mine Production is Decreasing.

Annual worldwide mine production of gold has decreased by 9.3% since 2001. Considering gold
prices have nearly quadrupled since then, why isn’t more gold being produced? The answer is
simple. Resources are being depleted and their quality is diminishing. And, when a discovery is
made, it takes about 7-10 years to get a mine permitted and into production – making it difficult
to quickly ramp up gold production.

Gold Trend #2: Gold is Getting Harder to

Find.

Fewer and fewer large gold discoveries are being

made every year. And the discoveries that are
being made tend to be in more remote and less
geopolitically attractive areas. Considering that
the risks to opening any gold mine are
considerable, mining companies just aren’t
interested in mining in areas that have significant
political and geographical drawbacks. As a
result, miners are having difficulty replacing
depleted resources.

Gold Trend #3: Investment Demand for Gold.

Large institutional investors, such as hedge and pension funds, are making large allocations to
gold and gold shares. Individual investors are also getting in on the action, with gold exchange-
traded funds (ETFs) gaining influence. SPDR Gold Trust (NYSE: GLD), the largest physically
backed ETF on the planet, is now the 6th biggest holder of gold bullion with more than 1000
tons. That is helping to facilitate and spread the ownership of gold by individuals. In fact, in the
first half of 2009 investment demand for gold is up 150% over the first half of 2008, according to
the World Gold Council.

Gold Trend #4: Central Banks are Buying Gold.

The Central Bank Gold Agreement, originally signed in 2001 and recently renewed for another
five years, limits the amount of gold European central banks – including the International
Monetary Fund – can sell to 400 tons per year. This means that even if governments want to sell
off their gold reserves, they can’t – further straining the supply of gold on the market. The U.S.,
the world’s largest holder of gold, is holding on to their stash as well. Some governments are
going even further: Venezuela’s Finance Ministry now requires 70% of gold produced in the
country to be sold domestically. At the same time, Russia, Ecuador, Mexico and the Philippines
are all buying gold. And China has increased its reserves by a staggering 76%.

Gold Trend #5: Push for Gold-backed Currencies.

As investors the world over lose faith in their government’s ability to contain the financial and
economic crises, many are calling for gold backed currencies – much like the U.S. dollar was
until the early 1970’s. Even Zimbabwe, which a year ago had hyperinflation running at 231
million percent annually, is now considering reintroducing its Zimbabwe dollar, but this time
fully backed by assets, including gold. In order for this to happen, countries would have to
purchase enough gold to back all their currency – putting extreme pressure on the gold supply.

Gold Trend #6: Asian Demand for Gold is Exploding.

Asia, with its more than two and a half billion people, has a major impact on investment
demand. Asians have a long-standing cultural affinity for gold as a store of wealth. India is the
world’s largest gold consumer. For the last 50 years, until 2009, the Chinese government has
forbidden its citizens from owning gold. But now China is encouraging its citizens to buy silver
– which automatically draws more attention to gold. Today, Chinese investors even have access
to gold-linked checking accounts. As a result, demand for gold in mainland China is expected to
triple in the next few years.

Gold Trend #7: Gold is in a Secular Bull Market.

Gold’s price has increased every single year since 2001. This is a clear signal that we are
currently in the middle of a secular bull market for gold. A secular bull market typically last
about 17 years and ends with a mania stage where investors throw the concept of supply and
demand out the window and frantically invest in gold. We’ve seen this same pattern repeat itself
over the last hundred years of investment history and we’re about to see a major run up in gold
prices. The gold market is very small in relation to the currency, bond or stock markets, so when
investors start to pile in, look out. Prices will go through the roof – making the tech and housing
bubbles seem small in comparison.

How to Play the Gold Rally

There are a few ways to play the rise

in gold prices. You can buy
investments backed by gold or you
can invest in gold miners themselves.

To play gold prices directly, invest in

the SPDR Gold Trust (NYSE:GLD)
Each unit of this ETF represents
1/10th of an ounce of gold. It’s
highly liquid, and provides you with
the quickest and easiest way to get
exposure to gold. It’s also the lowest
risk option, without the storage costs
associated with buying physical bullion.

Next up on the risk scale is the Market Vectors Gold Miners ETF (NYSE:GDX). This
investment vehicle tracks the world’s major gold and silver producers. While more volatile than
GLD, the leverage offered based on the gold price and profitability makes this an attractive
option. And you have the added benefit of owning some 30 precious metals producers all
wrapped into one simple investment.

Barrick Gold Corporation (NYSE:ABX) is the world’s largest gold miner. With lots of
liquidity, it draws considerable interest, in particular from big money institutional investors.
Keep in mind, ABX carries more risk than the two previous options, as you have exposure to a
single company. But this gold mining behemoth is sure to pay off big as gold rises and
eventually soars.