From the August 2008 issue of Investment Advisor • Subscribe!

August 1, 2008

A Golden Opportunity

The price of gold has been rising steadily since 2001. In 2007 alone, the spot price of gold rose 31.7%. Prices of other precious metals and select minerals have also been increasing. Does this bull market rally still have legs? Or is it time to sell?

Standard & Poor's Precious Metals Equity Analyst Leo Larkin is very much in the bull market camp, and bases his belief on good, old-fashioned supply-and-demand fundamentals.

"Despite the higher gold price, global production has been stagnant for the past 10 years," Larkin says. The low level of gold prices in the late 1990s led to a drop in exploration and large new discoveries."

According to data compiled by Gold Fields Minerals Service, a U.K.-based metals consulting firm and publisher, global output increased at a 0.8% compound annual growth rate (CAGR) from 1997 through 2006, while consumption rose at a CAGR of 1.5%.

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"We believe that production will remain stagnant for the balance of the decade, as old mines are becoming depleted and are not being replaced to the extent needed to lift output," says Larkin. "This, combined with rising demand, should cause the chronic gap between production and consumption of gold to widen further, in our view, helping to lift the price of gold."

Others disagree, saying this bull market for precious metals is looking very toppy, akin to the Nasdaq index before the 2007 tech crash.

Vanguard Precious Metals and Mining (VGPMX) is a top-five performer for one-, three-, and five-year periods. However, this no-load fund is closed to new investors; only existing shareholders can invest more money in the fund.

Oppenheimer Gold & Special Minerals (OPGSX) is a top-five performer for the three- and five-year periods. "Positive secular trends have continued to drive commodity prices higher," says portfolio manager Shanquan Li. "Perhaps most significant, demand for construction materials such as steel, copper, and zinc has remained robust from fast-growing emerging markets such as China and India, which are building out their industrial infrastructures."

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