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A bit of a bright spot for investors

Gold traditionally draws investors in tough times.

Arnd Wiegmann/Reuters

COMMODITIES

A bit of a bright spot for investors

Some experts see 2009 as a good year to buy gold, despite its downward spiral

By Theresa Ebden

With world economies reeling, one potential bright spot on the commodities horizon is gold.

Gold-bullish investors are spurred by an almost certain devaluation of the world's reserve currency, the U.S. dollar, on the heels of trillions of dollars in market stimulus. But they're also gauging the risk of inflation.

Gold, now trading at about $750 a troy ounce, often moves inversely to the greenback and investors have historically loaded up on the metal as consumer prices inflate.

The Reuters/Jefferies CRB Index of 19 commodities is down 56 per cent from a July record, to a six-year low, on fears that a worldwide recession will kill demand for industrial commodities. But that makes some gold bulls even more interested.

"I own gold - I'll buy more," says Jim Rogers, chairman of Singapore-based Rogers Holdings, and co-founder of the Quantum Fund with George Soros in the 1970s.

"The U.S. government is printing more and more money, it's going into a stupendous amount of debt. Only an idiot would buy government bonds. . They have to put it somewhere, like yen or renminbi, or wheat, cotton or gold."

Having hit a record high of $1,034 (U.S.) an ounce in New York last March, the metal is headed for its first annual decline in eight years. But a Citigroup client note said gold may rise above $2,000 in 2009.

Next year might not be the year that gold pays, but it almost certainly will be the year to buy, says Bart Melek, global commodity strategist at BMO Capital Markets.

He predicts gold will rise to $900 an ounce by the end of 2010.

But first there must be deflation, Mr. Melek says; then, once the stimulus kicks in, inflation will follow. Gold usually ascends one year before inflation begins to rise, he notes.

David Dodge, the former Bank of Canada governor and now a senior adviser at Bennett Jones LLP, says right now, "what people are worried about are low rates of inflation, or mild deflation in the short run, then there is no incentive to hold an asset like gold. Over the longer term, if everyone was concerned central banks wouldn't do their job and pull stimulus out, they would be wanting to hold assets like gold." Mr. Dodge says fears that central bankers will "do the wrong thing over time are overblown."

Oil

No commodity drew more attention this year than oil's 72-per-cent plunge from a high of $147 a barrel in July, to a four-year low last week when it closed barely above $40.

"You can buy oil stocks today at much less than it costs to buy the oil," notes Stephen Jarislowsky, chairman and founder of Jarislowsky Fraser Ltd., which manages about $40-billion. He owns Talisman Energy Inc. and EnCana Corp. on a bet that companies whose extraction costs or debts aren't high will benefit from a comeback. "Long term, oil is going to be scarcer, with a lack of supply than would otherwise come on the market," he says.

Mr. Melek predicts oil will eventually go back up to $90 to $100 a barrel, based on limited spare capacity, high marginal costs, limited infrastructure development and OPEC's growing power.

Potash

Although potash was trading at about $760 a tonne at the end of October, up from about $220 a year earlier, it isn't a great prospect now because "every fertilizer company increased production last year, predicated on prices twice what they were now," says Dennis Gartman, publisher of the Gartman Letter.

But Mr. Rogers is bullish on potash, even though supply may stay in the pipeline for a while. "If you have shortages in commodities in bad times, commodities will go through the roof," he says.

Zinc

Demand is waning for zinc, used in the production of galvanized steel, from which automobiles are made. The world's top two zinc producers, Belgium's Nyrstar and Korea Zinc, recently cut production and last week zinc hit a four-year low on the London Metal Exchange. "Zinc was hit hard," Mr. Melek says. "In China, I was told 60 per cent of their non-ferrous metals industry is losing money, and the entire steel industry lost money in October." Mr. Melek believes zinc will average 61 cents a pound in 2009, from about 50 cents now.

Copper

In China, the country known as the world's factory, manufacturing shrank dramatically in November and export orders dropped. Copper prices plunged to a three-year low, down to as much as $1.36 a pound last week. But Mr. Melek believes the correction is overdone and says copper will average 2009 at $1.85, and $2.50 in 2010.

Uranium

The price of uranium oxide has jumped by about 25 per cent over the past six weeks, now at $55 a pound. Mining for the commodity is expensive and highly regulated and the supply of deactivated warheads for conversion to fuel is waning. "Unless somebody brings new supply, the world is going to be out of uranium. There are all these nuclear power plants that are being built," Mr. Rogers says. In China alone, 33 reactors are under construction, with 76 more planned. Mr. Melek predicts uranium will average $59 a pound in 2009 and $60 in 2010.

Theresa Ebden is a producer for Business News Network.

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