Outlook 2011: The new gold rush

(For the rest of the Outlook 2011 special report, click here .)

On a late November day, five men in plastic snow boots and gaiters load their packs into a red–and–yellow Bell Long­Ranger helicopter. They're flying south from Dawson City to an area known as the White Gold District to stake mining claims — physically drive wooden claim markers — into the snow–covered ground.

Winter used to call a halt to gold prospecting and claim staking in the Yukon, but not in the past few years. Despite temperatures plunging to –30°C, crews continue to fly daily into the mountains. Last year, companies and individuals spent an estimated $180 million exploring for gold in the territory, up from just $7 million in 2002. By next summer, 500 people are expected to be doing exploration work out of Dawson, the biggest such influx this community of 1,300 has seen since the original Klondike gold rush.

More than a century after thousands of fortune seekers trudged over the Chilkoot Pass in a mostly fruitless search for the shiny metal, there's a new scramble going on north of 60 — similar to ones taking place around the world as the price of gold probes new highs. The Yukon rush started in 2007, when a persistent prospector by the name of Shawn Ryan optioned a block of claims he'd amassed over 10 lean years to a New Zealand company (taken over last March by Kinross Gold for $139 million). Since then, his RyanWood Exploration Ltd. has made other deals that could lead to the storied gold region's first hard–rock mine. "It's not the money; it's the game. It's the hunt," says Ryan. "It's all about the thrill of being right."

Ryan's voice is just one in a rising chorus of gold bulls — not just modern–day prospectors, but hedge fund managers, Tea Party leaders and suburban homemakers. This gold story is told in reality TV shows like "Gold Rush Alaska" and in the ascent of exchange–traded funds that hold nothing but bullion. A tale grounded in dissent from the economic orthodoxy of governments and central banks, it incorporates many reasons for gold's upward march from US$253 an ounce in 1999 to around US$1,400 today, many of them smacking of irrational fear, conspiracy and practical impossibility: peak gold production, hoarding by China's central bank, an imminent financial cataclysm or a return to the gold standard. The world gold market is too big for any one player to game, and yet too small to make gold a currency.

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Nevertheless, gold's climb remains a compelling narrative, one that gets validated anew with every record high. If you had sold all your assets to buy gold at the turn of the millennium, you would almost certainly be richer than you are today. So even skeptical investors would do well to listen to what gold's long bull run is telling us.

The hard part is separating the meaningful story from the market noise — in particular, the gold bulls from the gold bugs. True gold bugs — think Fox News host Glenn Beck — place their faith in gold regardless of market conditions. Often informed by a Hobbesian world view that distrusts mankind's ability to manage its collective affairs, they see only incorruptible gold, not fiat currencies, as a lasting store of value. As investors, though, they find it hard to press the sell button, which can leave them wrong for longer periods than they are right. Just think of the two decades preceding the last one.

Gold bulls, by contrast, are consummate investors who see in the yellow metal an opportunity for profit. That necessarily requires liquidating one's holdings — optimally at the top of the market. Even many gold bulls call today's bull run a bubble. They only differ from the gold bears on the timing of its pop. The bears will tell you it's imminent. The bulls think the bubble will grow much larger still. If they're right, and they have been for the past decade, there's a far greater reckoning ahead for the world economy than the rest of us ever imagined.

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Gold eludes economic models that reliably govern other assets, its value tied to a number of strings. The usual fundamentals, supply and demand, are of little use in understanding its price movements. According to the World Gold Council, the mining industry produced 2,579 tonnes of gold in 2009, and 1,672 tonnes were recovered from scrap jewelry, for a total (net of hedged supplies) of 4,028 tonnes. Demand for jewelry, electronics, dental fillings, coins and bullion totalled just 3,474 tonnes, leaving a surplus of 554 tonnes. Figures for the first nine months of 2010 show a continued oversupply, with total demand up 11 per cent and supply increasing 18 per cent. Yet gold's price rose by 29 per cent last year.

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