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Prospects in Gold

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Back when our overall economy was flatlining and the stock market was plunging, gold became a sexy investment pick among those who foresaw years of gloom and doom ahead. In the first three months of 2009, not only did the stock market continue its freefall, with the S&P dropping by more than 8 percent, but the Obama administration unveiled its $787 billion stimulus program, which caused many speculators to expect the return of runaway inflation.

A tumbling stock market combined with inflation fears provided the perfect setup for the return of gold as a cornerstone of many portfolios. Gold has long been considered a diversification play for people overloaded with securities as well as an inflation hedge. And for a while, it did not disappoint. Gold performed very well in 2009, rising about 11 percent that year, then soaring another 25 percent in 2010. The price peaked at $1923 an ounce back on September 26, 2011, and has been tumbling most of the time since then. After bottoming out at $1540 in March, it has now crawled back up to around $1640.

The hot question now: Is there another surge waiting in gold? Many financial pundits seem to think so. The Federal Reserve is set to hold its next policy meeting on September 12th and 13th, and there is a widespread feeling that it will announce a new round of bond purchases at that point. Even though the first two rounds of quantitative easing didn’t lead to widespread inflation, it’s still a touchstone of economics that pouring money into the economy could lead to higher prices. So more easing could provide a jumpstart to gold prices.

This may be already happening, to a certain extent. When the Federal Open Market Committee released the minutes of its latest meeting, earlier this week, hinting at further easing, the SPDR Gold Trust ticked up 0.8 percent on the day.

Another factor is that central banks have been buying gold lately, driving up the price. Purchases by central banks were up by more than 400 metric tons as of earlier this year, as opposed to a growth of just 156 metric tons in the year-earlier period. The World Gold Council has reported that it thinks those kinds of purchases will continue to increase in the near future.

In addition, there has been some evidence that gold tends to be depressed during an election year. The price of an ounce of gold is down nearly 15 percent since last September. Back in 2008, gold fell from more than $1000 an ounce in March to $740 by the time the presidential election came around in November. If that’s the case, then we can expect some sort of return to normal after November, with gold prices continuing on their upward trajectory.

There are other factors that can affect the price of gold, ones that are not necessarily in play now. The most common use for gold is not specifically for someone’s portfolio but in jewelry. Roughly two thirds of all gold demand each year is for jewelry, and the Number One country in terms of volume is India. Growth in the Indian economy, then, can have a direct impact on the price of gold. China too buys roughly as much gold for jewelry as the United States does.

Also, since gold doesn’t earn interest, like many securities do, its price benefits from lower interest rates. When interest rates fall, the price of gold tends to rise, and when rates rise, gold tends to fall. Rates are at historic lows now, but they haven’t shown a lot of upward movement as of yet.

There are a variety of ways to take advantage of gold prices, aside from simply buying coins, bars or jewelry. The SPDR Gold Trust is an exchange-traded fund that — unlike most ETFs, which buy shares of stock — buys physical gold bullion. It’s a favorite of many hedge fund managers; a full 26 percent of John Paulson’s hedge fund is invested in SPDR Gold. SEC filings show that George Soros has recently doubled the amount of gold in his hedge fund, and now owns more than 800,000 shares of SPDR Gold, which represents about 80,000 ounces of gold, or 5,000 pounds’ worth.  

Gold-mining companies are another way to play the price of gold. The three largest gold-mining stocks in terms of market cap are Barrick Gold, Goldcorp., and Newmont Mining. There are also several gold-mining ETFs, with the most prominent being the Market Vectors Gold Miners ETF, although it does hold some stocks of miners for metals other than gold. The purest gold play in this space might be Global X Pure Gold Miners, which invests strictly in companies that derive the majority of their earnings from gold. So if you agree that historical forces are aligning for another run-up in gold, there are plenty of ways for you to get in.

For more from Tom Nawrocki, see:

What Would QE3 Bring?

Apple in the Dow

America’s 10 Biggest IPOs


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