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7 Reasons Gold Will Surpass $2,500 - And Inflation Isnt One of Them

Golds price has quadrupled since 2000, yet this is just the beginning of a historic rise. Sevenmajor forces are set to push gold past $2,500 and were not talking about the tired old inflationstoryBy Peter Krauth Contributing EditorMoney MorningWeve all heard that inflation drives up gold prices. When inflation is on the rise, investors buymore gold to hedge their portfolios. And, with all the government bailouts and stimuluspackages, its hard to deny that inflation is coming. After all, the money supply has more thandoubled since October. Yet few people realize that inflation may be the least of the reasons whygold prices will push higher.

Since bottoming out in 2001, gold prices have risen by nearly 300% and have twice targeted the$1000 mark. And thats happened in a relatively inflation-free zone.There are other forces atwork here. This report will show you exactly why inflation is only a small part of the gold story.And, well identify the best ways to profit from the coming gold rush.

Gold Trend #1: Gold Mine Production is Decreasing.

Annual worldwide mine production of gold has decreased by 9.3% since 2001. Considering goldprices have nearly quadrupled since then, why isnt more gold being produced? The answer issimple. Resources are being depleted and their quality is diminishing. And, when a discovery ismade, it takes about 7-10 years to get a mine permitted and into production making it difficultto quickly ramp up gold production.

Gold Trend #2: Gold is Getting Harder to

Find.

Fewer and fewer large gold discoveries are beingmade every year. And the discoveries that arebeing made tend to be in more remote and lessgeopolitically attractive areas. Considering thatthe risks to opening any gold mine areconsiderable, mining companies just arentinterested in mining in areas that have significantpolitical and geographical drawbacks. As aresult, miners are having difficulty replacing

depleted resources.

Gold Trend #3: Investment Demand for Gold.

Large institutional investors, such as hedge and pension funds, are making large allocations togold and gold shares. Individual investors are also getting in on the action, with gold exchange-traded funds (ETFs) gaining influence. SPDR Gold Trust (NYSE: GLD), the largest physicallybacked ETF on the planet, is now the 6th biggest holder of gold bullion with more than 1000tons. That is helping to facilitate and spread the ownership of gold by individuals. In fact, in the

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first half of 2009 investment demand for gold is up 150% over the first half of 2008, according tothe World Gold Council.

Gold Trend #4: Central Banks are Buying Gold.

The Central Bank Gold Agreement, originally signed in 2001 and recently renewed for anotherfive years, limits the amount of gold European central banks including the InternationalMonetary Fund can sell to 400 tons per year. This means that even if governments want to selloff their gold reserves, they cant further straining the supply of gold on the market. The U.S.,the worlds largest holder of gold, is holding on to their stash as well. Some governments aregoing even further: Venezuelas Finance Ministry now requires 70% of gold produced in thecountry to be sold domestically. At the same time, Russia, Ecuador, Mexico and the Philippinesare all buying gold. And China has increased its reserves by a staggering 76%.

Gold Trend #5: Push for Gold-backed Currencies.

As investors the world over lose faith in their governments ability to contain the financial andeconomic crises, many are calling for gold backed currencies much like the U.S. dollar wasuntil the early 1970s. Even Zimbabwe, which a year ago had hyperinflation running at 231

million percent annually, is now considering reintroducing its Zimbabwe dollar, but this timefully backed by assets, including gold. In order for this to happen, countries would have topurchase enough gold to back all their currency putting extreme pressure on the gold supply.

Gold Trend #6: Asian Demand for Gold is Exploding.

Asia, with its more than two and a half billion people, has a major impact on investmentdemand. Asians have a long-standing cultural affinity for gold as a store of wealth. India is the

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worlds largest gold consumer. For the last 50 years, until 2009, the Chinese government hasforbidden its citizens from owning gold. But now China is encouraging its citizens to buy silver which automatically draws more attention to gold. Today, Chinese investors even have accessto gold-linked checking accounts. As a result, demand for gold in mainland China is expected totriple in the next few years.

Gold Trend #7: Gold is in a Secular Bull Market.

Golds price has increased every single year since 2001. This is a clear signal that we arecurrently in the middle of a secular bull market for gold. A secular bull market typically lastabout 17 years and ends with a mania stage where investors throw the concept of supply anddemand out the window and frantically invest in gold. Weve seen this same pattern repeat itselfover the last hundred years of investment history and were about to see a major run up in goldprices. The gold market is very small in relation to the currency, bond or stock markets, so wheninvestors start to pile in, look out. Prices will go through the roof making the tech and housingbubbles seem small in comparison.

How to Play the Gold Rally

There are a few ways to play the risein gold prices. You can buyinvestments backed by gold or youcan invest in gold miners themselves.

To play gold prices directly, invest inthe SPDR Gold Trust (NYSE:GLD)Each unit of this ETF represents

1/10th of an ounce of gold. Itshighly liquid, and provides you withthe quickest and easiest way to getexposure to gold. Its also the lowestrisk option, without the storage costs

associated with buying physical bullion.

Next up on the risk scale is the Market Vectors Gold Miners ETF (NYSE:GDX). Thisinvestment vehicle tracks the worlds major gold and silver producers. While more volatile thanGLD, the leverage offered based on the gold price and profitability makes this an attractiveoption. And you have the added benefit of owning some 30 precious metals producers allwrapped into one simple investment.

Barrick Gold Corporation (NYSE:ABX) is the worlds largest gold miner. With lots ofliquidity, it draws considerable interest, in particular from big money institutional investors.Keep in mind, ABX carries more risk than the two previous options, as you have exposure to asingle company. But this gold mining behemoth is sure to pay off big as gold rises andeventually soars.