The gold price recently made a new high amid widespread concern
over weakness in the U.S. dollar. The gold rally has been driven by
strong global demand among investors seeking a safe haven. Demand
has been driven mainly by uncertainty over the economic outlook, as
investors continue to recover from the fallout of the financial
crisis two years ago.
Many investors believe gold is a crisis hedge and attribute its
recent rally to the widespread belief that the financial crisis
persists. If nothing else, the credit crisis of 2008 should have
dispelled the myth that gold is the "ultimate crisis hedge," as it
was dumped along with everything else in the rush to achieve
liquidity two years ago. But gold does feed off investor
uncertainty and concerns about deflation, regardless of whether
such concerns are justified or not. It's the uncertainty factor
more than anything else that fuels investors' desire to stock up on
gold.
A momentum bull market in gold lasting several months is driven
by something more than fear, however. Gold's current rally is also
being driven by demand-industrial, consumer discretionary (jewelry)
and growing affluence among people in emerging countries. It's also
being pursued as a key asset among hedge funds that are always on
the lookout for an asset with strong fundamentals, which can be
pushed steadily higher with minimum risk of a drastic price
reversal. These are all factors one sees in a strengthening
economy. Thus, the gold rally can be viewed as another reason to
expect more recovery in the global economy.
In a recent issue of
Barron's,
Michael Santoli tackled the question that some investors are
starting to ask themselves: "Is gold in a speculative bubble?"
Recently, numerous investment analysts have asserted that when John
Q. Public becomes aware of a bull market, that market's days are
numbered. Well, the public is definitely aware of gold's recent
success. Does this mean the gold bull market is doomed to an
inglorious end soon?
To answer this question we need only to go back to the 1980s, at
a time when the U.S. stock market was at a point similar to gold's
10-year bull market. Everyone was aware that stocks were a hot
investment, and upper-middleclass and wealthy investors definitely
had exposure to stocks. Yet, the working middleclass didn't
directly participate in the '80s bull market by and large. Not
until about 15 years into the bull market did the average Joe
became involved with the stock market boom. And, by that point, an
asset bubble had definitely developed.
If you look around at the current investor makeup of the gold
market, you won't see much evidence that the public is
participating in this bull market. Instead, you'll see well-to-do
investors participating; though the public hasn't really bought
into this gold bull run yet. Even silver, which is the traditional
"poor man's gold," isn't exactly a hot commodity with the small
investor (notwithstanding the mini-mania in owning silver coins a
couple of years ago). Until we see broad participation from an
overly enthused public, there is no reason to expect gold's bull
market to end anytime soon.
I second Santoli's conclusion on the gold bull market: "But
there are just too many sound reasons for people of wealth to
continue pushing money toward gold. And there is too much of a
discount being placed on gold reserves in the ground based on the
valuations of gold mining stocks for this trend to fall apart with
any drama anytime soon."
One of the reasons behind gold's most recent rally involves a
shift of assets among conservative investors from low-yielding
bonds into gold. In a recent issue of his
Current Market Update,
Jack Ablin of Harris Private Bank observes, "Historically, the
opportunity cost for owning gold was considerable. However, now
that three-month Treasury Bills offer yields of a quarter of a
percentage point, investors feel they are leaving less on the
table." Ablin points out that gold's year-over-year gains are
typically consistent with a 2%-3% inflation rate. "Measured against
other commodities, like crude oil, its gains are well within
expectations," he concludes.
Gold's impressive rally in September was fueled in part by
seasonal demand from jewelry makers and by news that European
central banks had sold only 6 tons of gold this year (of the
allowed 400 tons to sell from their reserves as part of a five-year
European agreement). This represents more than 90% from their sales
a year ago. Instead of selling gold, central banks purchased 222
tons from the IMF, which has played a role in increasing gold
demand, as well as the price per ounce.
Another factor behind the latest rise has been the currency
component of the gold price. Once again, the U.S. dollar has taken
center stage as the Dollar Index has been in a downtrend of late
and the weak-dollar trend has provided additional fuel for the
rally in gold and gold stocks. Friday, the front page of
The Wall Street Journal
drew attention to the dollar's weakness and served as a podium for
discussion of the favorite political strategy of leaders around the
globe-exporting their countries out of recession. The current U.S.
presidential administration has broadcast its intent to boost U.S.
exports to help further the recovery in the business sector.
At the IMF/World Bank meeting on October 10th, global finance
leaders failed to resolve differences in policy that threaten to
drive a full-blown currency war. Martin Crutsinger writing in the
Associated Press reports, "Various nations are seeking to devalue
their currencies in a way to boost exports and jobs during hard
economic times. The concern is that such efforts could trigger a
repeat of the trade wars that contributed to The Great Depression
of the 1930s, as country after country raises protectionist
barriers to imported goods."
A U.S. policy that focuses on exports is conducive to a weak
dollar. This policy is also conducive to rising gold prices, which
is yet another fundamental factor bolstering gold's long-term
uptrend.
The yellow metal continues to garner publicity in the editorial
pages of mainstream newspapers and magazines at a rate not seen
since before the credit collapse two years ago.
Newsweek
recently ran an editorial piece entitled,
All That Glitters
by Nick Summers, who pointed to the conflicting currents of opinion
among financial analysts on the metal's near-term future. Summers
quoted Paul Christopher, a Wells Fargo strategist, who opined,
"Gold up to $1,300 is a rise that's tantalizing, but is risky. We
think it has further to run." In contrast, Vanguard's Chris Philips
sees the mainstream attention that gold's rise is attracting as a
red flag. He warns that gold ETFs may have gotten too big and,
therefore, vulnerable to a rapid decline.
Summers himself made this observation: "If gold is a good bet
for inflationary times, its performance in the low-growth years
since 2002 doesn't add up." He has hit on the essential truth of
the matter in that gold's best performance occurs when deflationary
risks are the primary economic threat-not inflation. There are two
times along the economic long wave that gold's price is most likely
to rise: 1.) In the final hyperinflationary period (e.g., the
1970s); and 2.) The final "hard down" phase of the deflationary end
of the long wave. This is the part of the long wave we've
experienced for almost 10 years. By the time gold's current
long-term bull market is over, I think it's safe to assume that
financial journalists like Summers will generally agree that gold
is the ultimate safe haven for deflationary times.
ETFs
An excellent proxy for tracking and trading the gold price is
the
SPDR Gold Trust (
ETF
) (
GLD
)
. For silver, we use the
iShares Silver Trust (
ETF
) (
SLV
)
. Quite a few useful ETF products have been introduced and are a
great benefit to individual traders who want to participate in the
trending moves of precious metals without the hassle of owning the
physical metal.
To that end, the ETFs are invaluable and you can be assured of
finding one for just about all the precious and industrial metals.
For instance, ETF Securities has launched four precious metals
funds in the past 14 months, including its flagship
ETFS Physical Swiss Gold Shares (
SGOL
)
, which is the first ETF in the U.S. to invest directly in gold
bullion housed in Switzerland. Its ETF for silver is the
ETFS Silver Trust (
SIVR
)
. ETF Securities has also recently introduced a platinum ETF,
ETFS Physical Platinum Shares (NYSE.A:PPLT)
and a palladium ETF,
ETFS Physical Palladium Shares (NYSE.A:PALL)
.
Another worthwhile ETF for investors looking to participate in
the junior gold mining industry is the
Market Vectors Junior Gold Miners ETF
(NYSE.A:GDXJ)
. Market Vectors also has a useful fund for tracking the uranium
price, the
Market Vectors Nuclear Energy ETF (
NLR
)
.
Speaking of ETFs, TD Ameritrade announced last week that
customers can buy and sell more than 100 ETFs with no commission.
The announcement is part of a campaign to drum up interest in ETF
trading among retail traders. Understandably, small traders have
been reticent to trade stocks and ETFs actively since the credit
implosion of 2008-not to mention the "flash crash" earlier this
year. Investors who want to trade ETFs may wish to look into this
attractive offer.
Clif Droke is the editor of
Gold Strategies Review,
providing forecasts and analysis of the leading North American
small-cap, mid-tier and senior mining stocks from a short- and
intermediate-term technical standpoint since 1998. He is also the
author of numerous books, including most recently,
The Stock Market Cycles.
For more information visit
www.clifdroke.com
.
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