Is It Time To Buy Gold?
- Follow The Yellow Brick Road
The question I get probably more than all others is, "Is it a good time to buy gold?" Much of the interest comes of course from its strong performance over the last decade while the stock market has provided a negative return. For the average investor, the Gold ETF (GLD) is the easiest way to play gold, even though the last few months have not been kind to the gold investor, or more like speculator. After making a new all-time high, just above $1,900 an ounce a few months back, it has got hammered all the way down to $1,500.
What is it about that shiny little metal? According to National Geographic, "all of the gold mined in human history would only fill 2.5 Olympic sized swimming pools." That amounts to 5.3 billion ounces, or about $8.6 trillion at today's prices. According to Goldfacts.org, China is the largest producer at 13.1%, followed by Australia with 10%, and the U.S. 8.8%. Production has been falling for a decade, although it reached 94 million ounces last year, worth $153 billion at today's prices. That would rank gold 5th as a Fortune 500 company, just ahead of General Electric (GE). It is also only 0.38% of global public debt markets' worth of $40 trillion.
The funny thing about gold is that you can be on either side of the trade and like gold. Typically, gold acts as an inflation hedge. Inflation proponents love to point to the unbridled printing of money by the Federal Reserve here in the U.S. and the ECB in Europe as a natural cause for inflation. They will be right, but not for years to come.
Deflation advocates on the other hand, me included, believe that the world banks are printing money to combat "deflation," and no matter how much they print, they will not be able to make up for all the lost wealth that continues to be destroyed by the current de-leveraging process. I discuss this in great depth in Facing Goliath - How to Triumph in the Dangerous Market Ahead. In this scenario, each time money is printed, it is debasing the world currencies, and gold is therefore going up as a third currency.
Recently, gold had been languishing. But something changed a few weeks ago. Bernanke started uttering the need for more, and lo and behold gold started rising. After making a strong support base in the $1,500 area, it has rallied $170 as worsening economic data acts as good news because it supports further monetary easing.
In recent years, there has been a major seasonal element to the gold trade, with gold typically bottoming during the summer. With Fall comes the September Indian wedding season when the massive purchase of gifts and dowries absorbs the gold supply. Ever wonder why India, with a population of 1.2 billion, is the world's largest gold buyer?
Next comes the Christmas jewelry buying season in western countries. That is followed by the gift giving and debt repayments during the Chinese Lunar New Year, during which we see multi-month peaks in the yellow metal. That is exactly what we saw this year. However, one wrench this year could be the slowing Chinese economy could generate less demand this time around.
Given that more stimulus has just been granted, it may be time to follow the yellow brick road. No matter what, gold should be just a reasonable portion of your portfolio based on a disciplined and structured asset location and allocation.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.