Why Gold Will Start Shining Again Soon

Gold has been going sideways since early May with the New York Spot ounce price at $1,204.80.  So why should you get in now?

Gold traditionally runs up in the fall almost every year.  Why?  One of the biggest reasons is that India, the world’s largest gold consumer, has its wedding season every year from September to December.  It is a cultural practice to decorate the bride with as much gold as can be afforded and this is a big contributor to the price of gold running up every fall – and in particular September.

 

SPDR Gold Shares ETF - NYSE: GLD
current price - $117.73
Year	Start Date	Start Price	End Date	End Price	Return	S&P 500 Return
2005	9/1	$39.94	12/30	$51.58	29%	2.2%
2006	9/1	62.14	12/30	62.21	-	8.2%
2007	9/4	67.44	12/31	82.46	22%	-1.4%
2008	9/2	79.20	12/31	86.52	9%	-29.3%
2009	9/1	93.90	12/31	107.31	14%	10.5%
		Average Fall Return =			14.8%	-1.9%

 

Even if you take out the disastrous 2008 return for the S&P 500 and the year of no return for gold, the fall return is still 14.8% to 3.9% in favor of gold.

 

There are a many ways to play gold;

1) Buy physical gold - Gold is offered online and on TV constantly as of late. Usually you pay a decent premium for these coins and one of the largest of these dealers has recently been criticized for these high premiums relative to the actual weight of gold you receive. This method of investing is not very liquid but should a financial apocalypse happen gold and guns will be what you need, but I doubt we get there.

2) Buy the GLD or SGOL - These are ETF's (exchange traded funds) that have actual physical gold in their possession and is the best way for the average person to buy gold.

3) Buy Gold Mining Stocks - Gold mining companies can give you leverage to gold. These companies dig holes in the ground and pull out gold. Some of these companies mine gold for way below the current price (as low as a few hundred dollars an ounce) and they profit by selling at the market price. These stocks carry more risk than just owning gold though.

With gold mining stocks you have many risks but you also should get a much higher return if the price of gold goes higher. If gold rises by $200 an ounce, you will make 17% with the GLD, but many gold stocks will appreciate more than 17%. With a gold mining company you have the risk of a mine caving in (event risk), a CEO making a bad decision (management risk) or of the government of the country that mine is in raising taxes on gold (political risk) or of even taking the mine away as happened in Venezuela years ago.

One way to diversify this risk is to buy the Market Vectors Gold Miners ETF - the GDX. This ETF is a fund that holds stocks in many different gold mining companies. Buying into this fund diversifies away the risk of something negative happening to any one company as you hold a basket of many companies.

 

One thing to be aware of with gold mines is that the geological formations that contain gold can often contain copper as well. Thus, many gold mining companies have two products; gold and copper. Copper is very economically sensitive and if an important economic number for the economy comes out, copper can sell off. This sometimes takes the price of the gold mining companies stock with it. No need to think copper mining is a bad business as many gold mining companies pull the copper out alongside and sell it. Pulling out copper is better than pulling out rocks right?

Gold has sold off for the last six weeks or so. The stock market went through earnings season and for the most part, earnings were solid. This caused people to sell gold to buy stocks as gold is a safe haven in bad times in the stock market. Earnings season is over so the flow of positive news will slow for awhile. Stocks have had a nice run and on any weakness, you just may see people shifting back into gold soon.

Tuesday, August 10, 2010 - 8:00 p.m.

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