Although there is a clear conflict between physical and speculative demand for gold right now, the precious metal has rebounded over 13 percent in recent weeks since hitting a three year low in June. The rally is being supported by short covering and strong physical buying from China. In fact, the latest data from the China Gold Association shows that the country's gold consumption rose 54 percent in the first half of this year, compared to the same period a year ago. Conversely, India imported $2.9 billion of gold and silver in July, down a third from the same period a year earlier. A slowdown in Indian consumption will free up some supply in an extremely tight physical market.
In a more definitive sign that investment demand may be returning, holdings in gold ETF, SPDR Gold Trust (NYSEARCA: GLD), rose by two metric tons (to 911.13 metric tons), the first increase since June 10. The consensus among analysts is that if gold moves above $1,348, it could test the $1,370 level and then $1,400. On the other side of the issue, gold bears cite a strong headwind for the metal as the Fed scales back on its monthly bond buying agenda. In all likelihood this will result in higher treasury yields which could effectively dumb down the attractiveness of gold, especially to investors looking for interest and dividends (of which gold pays neither).
Small-cap investors looking for positions in gold should consider gold mining companies that have shown recent interest from large fund managers. New Gold Inc. (NYSE: NGD), McEwen Mining Inc. (NYSE: MUX), Novagold Resources Inc. (NYSE: NG) and Coeur d'Alene Mines Corporation (NYSE: CDE) are all small-cap options that have attracted bullish attention from mega fund managers such as Goldman Sachs (NYSE: GS) and BlackRock, Inc. (NYSE: BLK). Large institutional investors have the resources and expertise to conduct extensive due diligence in their investment decisions. When they invest and converge on a specific idea, such as gold mining companies, the idea deserves further investigation. The smart small-cap investor can leverage this information as a starting point to carry out his/her own due diligence.
The bottom line is that investors need to pay attention to the relatively loose monetary policy by the Fed and how it will end, and it will end sooner rather than later in a crash of sorts. The crash will lead to deflation, which will lead to inflation, which, in turn, will be good for gold. Whatever the end scenario, hedging your bets with a strong position in a small-cap gold mining company with high mega institutional ownership should be productive in the near term. Follow the money.