Gold demand has outstripped supply for several years straight, yet gold prices have staggered. Worldwide demand has been increasing just over 5 percent per annum for the last several years. Supply, last year, grew at a lethargic 2.3% yearly rate. It is estimated that only 32,000 tons of gold remains in the ground. Meaning the vast majority of gold in our world has already been extracted. Gold related stocks have been some of the worst performing in the recent economic expansion. In a booming stock market investors would rather hold equity than stock. Stock prices have reached unprecedented levels leaving investors to explore alternative means to secure wealth. Gold mining is a very intensive process, thin profit margins have forced many players to consolidate operations or to leave the business, creating a lull in gold supply and enhancing the opportunity for prices to skyrocket when demand picks up.

Why is Gold so cheap when currently a large demand for gold exists in Jewelry and electronics products?
The reason for the cheap gold is that central banks have quietly been loaning gold to investors. Investors sell the gold at the market and invest the proceeds in better performing assets like treasury bonds. This action artificially inflates the supply of gold. Gold prices weaken and gold borrowers leverage more gold sales with their profits. What happens when gold prices begin to rise? A short covering rally ensues when the gold borrowers scramble to buy back the gold on loan from the central banks, breaking the downward spiral.

This could be the beginning of a snowball effect propelling gold prices higher and higher. Central banks now require a greater rate on gold they lend. What does this mean? Central banks believe that gold prices are cheap, and when gold borrowers scramble to buy back gold, central banks don't want to get stuck with the bill. When gold prices rise, demand may actually increase. This thinking is counter-intuitive, but the basis for most successful system trading. Hedge funds are typically trended following. This means that they go with the flow. When gold establishes a definitive uptrend, which may happen within days or weeks, funds will actually be looking to buy gold, allowing the lucky few who got in first to get a free ride.

As Y2K approaches stocks, currencies and economies will become more volatile, enhancing the appeal of gold. Imagine a nation with hyperinflation, a worker takes their pay directly to the market to buy essentials, knowing that the same goods may cost twice as much tomorrow. Yet people who hold gold are protected, it is the unspoken currency of last resort. Gold acts as a hedge against currency devaluations and high inflationary environments. The interdependence of nations has created the global economy, Y2K is a global crisis. Demand for gold may appreciate globally more so than anticipated domestically. The perception of gold in the United States is unlike that prevailing throughout the world. In China, gold ranks 3rd on a consumers wish list, trailing only a refrigerator and a television. Developing economies are expected to bear the worst of the millenium bug. They lack the technical workforce and resources necessary to correct the problem.