Time To Strike Gold?

| About: SPDR Gold (GLD)
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Quantum Leap

In the last 30 days, gold has experienced some dramatic price fluctuations that have many investors taking note of a potential opportunity to profit from SPDR shares of gold (NYSEARCA:GLD). The 30-day high reached $1,605.40 an ounce and a low of $1,352.40. But even this substantial swing is small in comparison to the action that many investors believe they missed over the last five years where the precious metal saw astounding growth of over 40%. This has left many wondering if now is the right time to enter the market, or if this is merely a short-term dip unlikely to yield any real value. However, one man may be able to tell us the answer.

There is no one who has a name more inextricably linked with commodity trading than legendary investor Jim Rogers. In 1973 he co-founded the Quantum Fund with partner George Soros. The investment vehicle has become embedded in Wall Street lore due to a remarkable 10-year return of an unheard of 4200% (consider that the S&P 500 picked up only 47% over the same time horizon). This allowed him to retire in his late thirties and enjoy a reputation for a mastery of commodities trading. Not surprisingly he has had a lot to say about the recent decrease of gold prices and many have been eager to listen.

In a mid-April interview with Business Insider Rogers attributed the falling price to four key factors. First, worldwide demand has been slowed as a result of India's decision to increase the gold import tax rate to 6% (this is a 50% increase). Second, the predictions from people like Societe Generale analyst Stephanie Aymes and others have perhaps helped hasten the fall with warnings of $1,265 an ounce. Third, as Rogers himself puts it in his blog, "the collapse of the Bitcoin over the past two weeks coincides with many of the digital currency's owners also owning gold." Finally, the decision by Cyprus to sell most of its gold has levied an impact. As Reuters reports, "Cyprus plans to sell 400 million euros worth of reserves to finance part of its bailout, according to European Commission documents. The move marks the biggest eurozone bullion sale in four years." Yet, for investors focused on the creation of wealth the question is not simply why but when will it bottom out creating a true value proposition for speculators.

Hot Enough To Strike?

Again, Jim Rogers has been a major voice in this debate. As with any investment this number is unquestionably unknown. But as speculation mounts many ears have turned to the voice of proven talent. "I have repeatedly babbled about $1,200-1,300, but that is just because that would be a 30-35% correction which is normal in markets," Rogers explains. He offered more insight into his strategy by saying, "if it goes to $1,300, I hope I am smart enough to buy some," he said in Singapore. "If it goes lower to $1,200, I hope to buy even more. If... that's not a prediction." This of course would be a clear drop but is it enough and what can investors glean regarding the future value of their purchase in the long term?

It is important to realize that gold prices do not move only for the reasons outlined above. There are other factors in play many of which have more permanent influences than evolving political landscapes or Bitcoins. Consider the demand from the technology sector alone. The gold required for the circuit board bonding wires in the estimated 1 billion phones manufactured each year comes to as much as 91 metric tons. The high efficiency of the conductivity is a critical component. Gold has some less known applications in energy efficiency. Same amounts of the metal are applied to building windows to reflect sunlight keeping the structures cooler in hotter climates. Gold also has uses in medicine where tens of metric tons are used in dentistry as well as cancerous tumor treatments and rapid HIV screening tests. Additionally, as the automotive industry enjoys rapid expansion in developing countries, we can expect to see the metal even more widely used. Gold can often be found in the manufacturing of catalytic converters on diesel vehicles.

In 2010, a reported 118 metric tons of gold were used industrially. An incredible 71% of this total was attributed to electronics. More interestingly, in the second quarter of 2011 only 39% of the gold demand came from investors. What does this tell us? Gold is a tricky investment vehicle because the demand resides in a vast number of industries that are ever expanding. To complicate the issue further, it is evident that as the price rises, the use of gold in these various fields may be substituted for other precious metals that can accomplish the same job (e.g. conductivity via palladium) at a lower price. This alone has an impact of where gold trades.


The fact remains, gold has experienced a sharp downturn and investors might be looking at serious opportunity if the downtrend persists. Savvy buyers will remain cognizant of the cyclical nature of the commodity and the strategy put forth by Jim Rogers to wait it out a bit more before jumping in.

Like all other investments, this can be diversified over a precious metal fund without having to limit yourself to the risk and swings of just one metal. In just the last few days, watchful investors have seen this drop show some bounce back. This late trend will be an important one to watch in the coming days and will likely serve as an indicator of opportunity. A short-term drop may also simply be a "correction" and not a solid play.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Catalyst Investments is not a registered investment advisor or broker/dealer. Readers are advised that the material contained herein should be used solely for informational purposes. This information is not investment advice or a recommendation or solicitation to buy or sell any securities. Catalyst Investments does not purport to tell or suggest which investment securities readers should buy or sell. Readers should conduct their own research and due diligence and obtain professional advice before making an investment decision. Catalyst Investments or anyone associated with Catalyst Investments will not be liable for any loss or damage caused by information obtained in our materials. Readers are solely responsible for their own investment decisions. Investing involves risk, including the loss of principal.

Business relationship disclosure: This article was written by an analyst at Catalyst Investments.