You can’t go wrong with gold

Gold has passed the $500-per-ounce mark in some style, says Dailyreckoning.co.uk. But don't think that its bull run is now going to take a breather, because it isn't.

As DRDGold chief executive officer Mark Wellesley-Wood points out in his firm's latest newsletter, "Global gold production is set to decline dramatically", which will "generate a scramble for gold ounces" that will just keep pushing prices up. In the third quarter of 2005, gold demand rose 7% in volume terms and 18% in dollar terms.

The gold bears may think rising prices will create rising supply and hence a self-correcting situation, but, says Wellesley-Wood, they are wrong. "Expenditure on exploration peaked in gold mining in 1997, and has been pretty flat since then." There are currently 29 new gold mines in the pipeline, but even if all these are developed, they won't make up the deficit between them.

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Worse (for the bears), "the reality is that not all these 29 mines will get the go-ahead as cost inflation, especially capital-cost inflation for resources projects, has increased by a great deal more than the gold price". In 2004, the supply of gold actually fell by the most in 39 years.

So what should investors be buying? You can't go wrong with physical gold, says the Daily Reckoning, but gold shares look more and more interesting too. As the supply crunch continues, expect to see "merger and acquisition activity and industry consolidation continue apace", says Wellesley-Wood. "If you can't find it, buy it."