There is no shortage of cheerleaders in the gold market these days, as prices of the precious metal continue to climb. The spirit is warranted, analysts say, as the shaky U.S. dollar, paired with the flat supply of bullion worldwide, are signs that gold-related investments will continue to thrive.

As of Feb. 5, the spot price of gold had risen to $1,066.50 an ounce, up from the $920/oz. that it was trading at a year earlier. (All figures are in U.S. dollars.)

“The general direction is up for the next two years,” says Patrick Chidley, senior mining analyst with Stamford, Conn.-based Barnard Jacobs Mellet (USA) LLC, who predicts gold will trade above $1,200/oz. by 2012.

Driving the investment demand for gold is the fear of the US$ devaluing further, as the precious metal can act as an alternative to the currency. Since the market collapse of October 2008, the US$, in Canadian-dollar terms, has fallen to C$1.07 from C$1.22.

And if the greenback continues to fall in value, Chidley says, the rally for gold will continue: “Gold is the most liquid and easily traded of hard assets” — which makes it most attractive for sheltering the value of savings against declining currency values. Although the US$ and the euro have strengthened over the past year, that won’t last long, he adds: “Those are just near-term sideshows.”

Paul Vaillancourt, senior vice president and director of portfolio strategy, managed investment solutions, with Franklin Templeton Investments Corp. in Calgary, agrees, noting that gold is becoming a “pseudo-currency. The objective here is some kind of store of value for your assets, with fear and panic taking over markets. It’s portfolio insurance more than an inflation hedge.”

Some investors assume incorrectly that gold will protect their portfolios against inflation, he adds, but, unlike oil, gold cannot act as an inflation hedge because it has limited commercial uses and cannot move upward with inflated prices.

In the long run, the devaluation of the US$ relative to the Chinese renminbi is what people should be paying attention to, says Martin Murenbeeld, chief economist with Toronto-based DundeeWealth Inc.: “While we tend to think of the US$ falling compared with the euro, that correlation isn’t durable. The question is: what is the US$ going to do against Asian currencies? This is important because [China] is where most of the demand is for gold.”

With the U.S. wanting to reverse the trend of importing more goods and services from China than it exports to that country, the US$ must continue to fall relative to the renminbi if that is to occur, says Murenbeeld. That scenario, again, is good news for gold.

The advent of gold-linked investment products such as exchange-traded funds and gold certificates, he adds, have made the investment market for the precious metal much more popular and accessible.

For instance, the demand for gold for investment products skyrocketed by 88%, to $42.7 billion for the year ended Sept. 26, 2009, from $22.7 billion a year earlier, according to the London, England-based World Gold Council in its November 2009 report. But despite this increased demand, the global supply of gold has remained flat, says Chidley, which should also boost gold prices.

“Just because gold goes up $500 an ounce, there is unlikely to be an extreme supply response, as it takes up to 10 years to build a new gold mine,” he adds. “There are a lot of big projects that won’t get built, even if gold prices go up, as investors don’t want to invest for more than five years before they see returns.”

Political and environmental regulations around the world also make it difficult for mining firms to expand their game plan. “Many gold reserves are available in Russia or the Philippines, but they won’t become mines because those countries are unstable,” adds Chidley.

Meanwhile, environmental regulations in the U.S. and Canada also make it very difficult for players to open new mines — even though those political regimes are stable.

As long as the US$ continues to decline and the global gold supply remains flat, Murenbeeld predicts prices for the precious metal to average $1,172/oz. in 2010 and reach $1,234/oz. by yearend. He then expects the average price to go as high as $1,280/oz. in 2011.

@page_break@The companies expected to benefit from the gold’s rise in price are Toronto-based Barrick Gold Corp. , Greenwood Village, Colo.-based Newmont Mining Corp. and Vancouver-based Goldcorp Inc.

Barrick saw its revenue rise slightly, to almost $6 billion for the nine months ended Sept. 30, 2009, vs $5.8 billion in the same period in 2008. However, Barrick suffered a loss of $4.5 billion for the nine months in 2009, compared with the $1.3 billion it earned a year earlier. The company saw a huge decline in its net earnings because it fulfilled its gold and silver sales contracts in advance of their due dates by buying up bullion at higher spot prices on the market, as opposed to selling gold and silver obtained from its mines.

In the past, when the outlook for precious metal prices was uncertain, these sales contracts had allowed Barrick to hedge the market and guarantee that it could sell its gold for a specified price in the future. However, with the outlook for gold prices more buoyant than ever, Barrick doesn’t want to be in the business of guessing what future prices are going to be, says Vaillancourt: “It wants to ride the full price of gold” and sell its output at current market values.

That wasn’t possible with the sales contracts, he says: “For example, let’s say it’s 2005 and gold is at $400. If [Barrick] predicts the price of gold in 2006 will go up to $600 and it locks into a contract today that will sell its gold at $500 in 2006, but then the market value of gold in 2006 goes up to $800, it missed the boat.”

By getting rid of its sales contracts, Barrick is essentially linking its massive reserves, revenue and, consequently, its share price to the price of gold. And with the price of gold on the rise, Vaillancourt says, this is the type of producer inves-tors want to put their money into.

Other firms, such as Newmont and Goldcorp, have advantages in that they mine base metals to diversify operations. For example, Newmont’s base metals unit helps its profitability, says Chidley, as sales of copper improve its top line.

Sales for Newmont rose to $5.2 billion for the nine months ended Sept. 30, up from $4.8 billion a year earlier. Its net income remained flat, at $1.2 billion vs $1.1 billion.

Meanwhile, Goldcorp’s revenue for the nine months ended Sept. 30 was about $2 billion, vs $1.8 billion a year earlier. Goldcorp’s net income fell to $173.5 million, vs $517.5 million.

Although Goldcorp profited from the increase in gold prices over that 2009 nine-month period, net income declined due to non-cash expenses, such as the accounting of future tax liabilities on new mine acquisitions and the decline in copper prices. (The company mines other metals, such as silver and copper, to diversify its operations.) Labour and production costs also increased.

These mining companies should benefit from the gold rally in the long run, but if you are considering buying their stocks in the near term, watch out, says Murenbeeld: “Advisors should understand that gold equities don’t always behave the same way gold bullion does.”

The reason, he says: just because these companies are linked to the price of gold, they still move in sync with equities markets: “Markets sink at certain times, and gold equities behave like typical equities.”

For these reasons, Murenbeeld says, gold and gold-linked securities should make up only 5%-10% of a client’s portfolio as a hedge against economic uncertainty.

Although gold-linked equities are expected to shadow the bullion market for the most part, it may take some time for the rally to come through, says Chidley. Generally, for every 1% shift in the price of bullion, related equities should mirror that change by 2%-3%.

“With certain periods of cost inflation, the higher revenue of these companies have not come through as much as they should have,” says Chidley, which explains some of the poor results. Thus, it’s also important to be aware of the costs firms are incurring — not only the sale value of the gold they are producing.

Finally, clients invested in gold should also be aware of the negative impact of good economic news, says Vaillancourt: “Gold does well in times of uncertainty.” IE