Gold News

Buying Gold in Fall

If Gold is a protection against devaluing currency, how come it rises on deflation fears...?

IF HISTORY IS ANY GUIDE, autumn is a great time of year to Buy Gold, writes Lara Crigger of Hard Assets Investor.

Here she speaks to Frank Holmes, CEO and chief investment officer of US Global Investors, the investment adviser managing 13 natural resources and emerging market mutual funds.

On average, says Holmes, the Gold Price rises about 2.5% in September above its August price – not too shabby. But will it be enough to break $1,000 for good?

Lara Crigger, HardAssetsInvestor: Historically, September is the best month for both US-Dollar Gold Prices and gold stocks. Can you explain what drives this trend?

Frank Holmes: There are several factors that contribute to good times for gold stocks and bullion. Basically, the stars are all aligned, especially for jewelry and financial.

First of all, let's deal with the jewelry demand. Right now kicks off what I like to call the planet's most potent gold demand drivers. The rainy season is over in Thailand, Vietnam, Bangladesh, India, and people have started going out from the village and Buying Gold. So you move into the post-monsoon wedding season.

Then you have Ramadan, the big Muslim holiday, and gold-giving is very significant during Ramadan. Then, in November, is Diwali season – it's extremely festive, the Season of Lights. There's a tremendous amount of gold gift-giving, like at Christmas time. And then there's the restocking that happens in advance of Christmas by retailers in the US and Europe. After that, it's the Chinese New Year, which peaks things out by February. The stronger September is, however, there's usually a big correction in October.

HAI: Why is that?

Frank Holmes: The Dollar, which is the financial component in this equation. Going back over 20 years of data, looking at the correlation on weekly price movements, you see that there is a 70% inverse correlation between the direction of the Dollar and the direction of Gold Prices. So September and December are two months of the year where the Dollar is weaker, although last year was a bit of an anomaly.

Historically in September, the US market is down. But what's interesting is that lately, we've seen the market's actually doing better when the Dollar is weak. The market corrects – including even gold – when the Dollar is strong. Why is that? Because a weaker Dollar helps us export.

So people say that a weak Dollar is good for gold, so it's bad for America. But now, it's a weak Dollar is good for America and it's good for gold! That's the shift we're seeing.
 
HAI: We've seen a lot of reduction in jewelry demand, especially in India. How will that impact prices?

Frank Holmes: In our recent research, in India there's a lot of concern about the economic slowdown, and they're starting to save more. Jewelry demand was off 31%. But the positive part is that the rupee has fallen so much, so, in rupee terms, gold has gone to an all-time high. In rupee terms, you've not lost any money in gold in the past year, although in the stock market, you have.

One of the largest gold jewelry stores in India has commented that they're seeing pickup now, that people are feeling less threatened that there's less risk of a major depression, so they're buying gold.

The other factor is China. China is the No. 2 gold market in the world, but it's also the No. 1 gold-producing nation in the world. But any gold that's being produced in China, their central bank is buying it all, so that supply is not hitting the world. And in China, for a year-over-year basis, gold demand actually increased 6%.

HAI: We've seen relatively flat investment demand for gold in the past quarter or two. Will that stay the same as we move into September?

Frank Holmes: It comes in waves. It's not straight up. What you saw, some of the hedge funds repositioned and bought stocks, as the stocks outperformed bullion this year. Last year bullion outperformed the stocks. So you're seeing this rotation.

There have been many times when the ETF goes all out that gold has just gone sideways or even declines a bit. Several people who were in at such size wanted to take delivery to make sure the gold was there. They also wanted to be more discreet, so that nobody knew exactly how much gold they owned. And the cost of the insurance and everything else, it was just cheaper for them to buy it.

HAI: So will the historical September uptick be enough to help us break the $1,000/oz barrier?

Frank Holmes: Well, you have to remember that the Dollar is substantially higher than it was 18 months ago. If the Dollar goes back to June of 2008, then you'll probably see gold at $1,200.

There's one more thing that I think is very important: Since 2001, our thesis has been that this is a deflationary gold cycle, not an inflationary gold cycle. So gold has gone from $250 to $1,000 on deflation, not inflation.

HAI: That's different than what many people are saying. Why do you think so?

Frank Holmes: History has shown that whenever the government pays you less interest than the inflationary rate, they're worried about deflation. They're trying to stimulate the country. So for the past eight years, 80% of the time we've been dealing with negative interest rates. That's a key factor.

Historically, when the gold has been weak and the Dollar's been strong, that's when the government pays you 3% over the inflationary rate. So if inflation is running at 1%, then they should be paying you 4% on a Treasury. But they're not. You're earning less than the inflationary rate. Therefore you should be owning some Gold.

The other factor is when you have deficit spending and negative interest rates, which we have right now. When President Clinton was in power, we had the opposite: We had a surplus and we had positive interest rates. And guess where gold was? It was a dog. It was terrible.

Now this is all reversed, and there's no big runaway inflation. That's where you still have financial instability. Governments are going to print money like we've never seen before, they're going to keep interest rates low, so they can stimulate this economy and get things back on track (if they can). And they're going to devalue the currency with that.

So you can devalue a currency with big deflation or big inflation. Anytime you get either, it's instability into the currency, and gold does well. And that's what we're living with right now. We have the deficit spending – $10 trillion and growing – and it's going to be around for many, many years. So I think we're going to see gold trade higher.

HAI: A few months ago, you wrote that the time was right to purchase Gold Mining stocks. Why is that, and do you still feel that way?

Frank Holmes: There's a high correlation between confidence in gold stocks and the financial index. If the banks are healthier, then you start to see money going into small-caps and mid-caps, in all asset classes. It has a significant impact in confidence in gold stocks.

HAI: Do you think that mining stocks will continue to do well from here on out?

Frank Holmes: Well, they've had a heck of a move on a relative basis. Like today, gold was up about 1.72%, and gold stocks were up 6%. So it still offers tremendous leverage to the upside. One just has to be selective.

We tell people that they should focus on those companies a) that are unhedged, and b) where the management cares about value per share, not value destruction by acquiring everything and anything, destroying the production-per-share and reserve-per-share metrics.

HAI: Back to Gold Bullion, is it too late to get in now and take advantage of the September rise?

Frank Holmes: I don't think so. I just think you don't run in to get rich. You don't say, "Okay, I'm going to get rich on gold tomorrow." Leonardo di Vinci once said that "Anybody looking to get rich in a year is destined to go to jail." That was 600 years ago, but it is still a brilliant line.

Gold is a protection against the devaluing of the currency, so you want to have a 5-10% weighting in Gold and gold stocks. You can have some in mutual funds, some in the gold ETF, some in equities and you can buy gold coins. And you should rebalance. Every time gold has these big moves, take some money off the table, and every time there's a big correction, reinvest. Some people have 20%, other people have 5%, but our math has shown that 10% is prudent.

Hardassetsinvestor.com is a research-oriented website devoted to sharing ideas about investing in the natural resources sector. Published by Van Eck Associates Corporation, the site offers an educational resource for both individual and institutional investors interested in learning more about commodity equities, commodity futures, and gold – the three major components of the hard assets marketplace.

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