Gold Can Add More Glitter to Your Portfolio

These days, yellow metal gold has become the most popular choice for investors due to its recent upside movements. The fall in dollar value against major currencies, along with ambiguity over further upside in equity markets, is convincing investors to park their money in gold as a safe haven for buying. Regarding price movements in 2009, with the favorable fundamental situations, it has been trading northward so far. We know that a cocktail of factors (injection of stimulus packages, excessive printing of paper money, widening trade deficit, rising debt, gold mine supply at a historic low, buying by central banks, historic interest rate cuts, deteriorating US economy, shrinking trade activities etc.) are likely to keep gold in an uptrend going forward.

However, if we talk about the latest movements in gold, it is more seasonal. Seasonally, September is the best month for investors to invest. Over the past four decades, it has been giving the best return on month over month appreciation. Furthermore the chart below also depicts the same. Even festive demand gives underlying support to gold prices and fourth quarter bullishness in prices continue. Physical buying begins in India due to holiday and wedding demand and it continues through China‘s New Year celebration. Western economies participate in buying during Christmas. It has a “low season” too which runs from March to July. This pattern occurs even in secular bull markets.

Average Monthly Movements Of Gold On 22 Year Chart In COMEX

(Unit $ Per Troy Ounce)

Source: SMC

However, this September could be a challenging month due to the economic slowdown, but any downside in gold prices will further stimulate buying as this time a rally is likely to be supported by investment demand as well. Even investment in gold mining stocks is lucrative for investors right now. After the soft months of June and July, gold mining stocks start to bounce in August and September. Apart from seasonal demand there is one major factor which boosts gold prices. We have witnessed two major shifts in gold in the past few years, which is showing the change of priority of uses of gold.

Falling jewelry demand and rising investment demand

Rising gold prices have hit demand for gold, which is mainly used in jewelry. In India in the first quarter, gold imports declined by more than 80%, due to a decline in demand for physical gold. Despite this massive fall in jewelry demand, gold is trading in an upper range and this rise could be attributed to investment demand of gold, which in 2008 alone saw the rise of around 64%. Gold coin shortages, a surge in gold ETFs, and the rising premium shows the investment demand of gold. According to the Financial Times, the US Mint sold 193,500 American Eagles in the first seven weeks of this year (more than it sold in all of 2007 and at prices 40% lower). This investment demand has improved further in 2009 with the existing historical turmoil in the market. Investors prefer to diversify their 5-10% of their portfolio into gold in such type of economic crisis.

Central banks increasing their gold reserve

Even central banks and many governments bought gold or they are in the process of buying gold for a “flight to safety” due to the fragile movements in world reserve currency of the US dollar. ECB (European Central Bank) has slowed its gold sales from the last two-three years. According to World Gold Council data, in the current gold year which began in September 2008, the ECB sold only 140 tonnes of gold out of 500 tonnes. Recently, it has announced that now the gold sales quota is only 400 tonnes as compared to 500 tonnes earlier. It also shows that demand for gold is everywhere. Russia increased its limit from 5% to 10%. China has planned to increase its gold reserves from 500 tonnes to 4500 tonnes. It has already doubled its gold reserve from 500 tonnes to about 1100 tonnes now targeting more. The Russian Central Bank, Middle-Eastern and the People’s Bank of China have become buyers of gold along with other nations. Central banks still hold 29,000 tonnes of gold in their currency reserves.

The way major world economies have injected stimulus packages to get out of the woods has rekindled the concern of inflation. This would again send investors into precious metals. Historically, it is evident that when US debt rises, it pushes up gold prices. For example, from 1970 to 1972, the U.S. government's debt increased by $50 billion and the price of gold went up 80% during the same period. Currently, US debt is at an all-time high, which is expected that it will support gold to achieve a new high in 2009. According to World Gold Council reports, India’s bank deposits saw 22 percent year-over-year growth in the second quarter of 2009, hence even a small spending of that savings over gold can spur physical buying in India.

Gold may touch new all-time highs in 2009 as capital inflow is increasing day by day. On the other hand, the dollar is losing its value gradually. At present, it is prudent to allocate at least 5-10% of the portfolio in gold via gold ETFs, gold futures or gold coins or bars.

Comments

[Clint007:]

For me, I can say that other resource sector (Copper, Manganese, Lithium ...) should be added to my Gold portfolio (80%) since a year.

Sep 17 09:12 AM

[Mad Hedge F...:]

qqw Brace yourself for the impending gold shortage. Gold shortage? Yup. With the launch of the eighth gold ETF this yesterday, the ETFS Gold Trust (SGOL), total ETF holdings of the barbaric relic reached 54 million ounces worth $55 billion, more than total world production in 2008. Last year, South Africa suffered its steepest decline in gold production since 1901, falling 14%, to a mere 232 tons. It now ranks only third in global production of the yellow metal, after China and the US. Severe electricity rationing, a shortage of skilled workers, and more stringent mine safety regulations have been blamed. Choked off credit has frozen the development of new capital intensive deep mines, as it has for everybody else. Rising production costs have driven the global breakeven cost of new gold production up to $500 an ounce. In the meantime, the financial crisis has driven flight to safety demand for gold bars and coins to all time highs. Last year, the US Treasury ran out of one ounce $50 American Gold Eagle coins, now worth about $980. Competitive devaluations by almost every central bank, except Japan, mean that currencies are not performing as the hedge that many had hoped. It all has the makings of a serious gold shortage for the future. Could last year’s downturn be a blip in the eight year bull market? Now that we are solidly over $1,000, kissing $1,025 last night, the match could hit the fuel dump at any time.

Sep 17 11:43 PM

[Surabhi Sharma:]

Yes , and it made its life time high in 2009....rightly said Ms. Bharti.

Dec 23 05:56 AM