Central banks around the world, exactly the same organizations that are responsible for the flood of money, are buying gold too.  This demand is helping to propel gold prices higher.  India, Russia, and China are just three countries that have increased gold reserves in recent months.  In November, India bought 200 metric tons from the International Monetary Fund. 

Gold’s attraction as a safe-haven asset has also been strengthened by central banks’ stated intentions to diversify away from the U.S. dollar, and by debt concerns in countries such as Dubai and Greece.

As the U.S. dollar weakens, the price of gold strengthens.  And it’s already started, with gold rising 14% from $1,062 an ounce in November 2008 to $1,210 today.  Now I’m not saying that the dollar is going to plummet, but I’m sure not holding my breath for a bull-run in the greenback anytime soon.

By buying miners, investors have leverage to the upside since margins expand with higher gold prices.  That’s because production cost per ounce is fixed.

I recently recommended a gold miner to subscribers of my SmallCapInvestor PRO advisory that operates with some of the lowest costs in the industry. The company’s cost per ounce of gold produced was only $271 in 2009. Every dollar increase in the price of gold means an additional dollar of profit to this company.  Or more money available to fund expansion, increase production, pay down debt, or return to shareholders…

Gold miners will still generate revenue even if gold prices trade in a tight range, or even decline.  But any decline will be short lived, and a return to gold below $1,000 remains very unlikely.  There’s simply too much demand for gold right now, and with investors piling into gold, the bull market is likely to continue.

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