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Revler1082 (< 20)

Gold Season is Upon Us

Recs

8

August 19, 2010 – Comments (10) | RELATED TICKERS: SLW , JAG

 Hello everyone, and good morning. This is my first forray into the Fool blogging world, so please forgive any glaringly stupid mistakes I may make.

 With that said, I'd like to talk about gold, and seasonal trends. As many of you may well know, August is historically the worst month (demand-wise) for gold. However, it leads us into the gold demand bull season starting in September (India).



Given this information, there are several questions that I would like to discuss with the Fools out there (thank you in advance for your answers and time):

 1. I'm not sure how well India is doing (I haven't followed it closely enough to make a claim here), but with the global slowdown, and the higher price of gold than in previous years, will demand be as great as it has been in the past?

 2. I wanted to play this trend with some of the miners, but rises in gold in previous years have not translated directly into profits for the many of these stocks. Investing in the physical asset has been a much better play. If gold continues to rise, can we expect the miners to catch up? After all, they are supposed to be leveraged bets on the price of gold.

 3. We seem to be peaking here, and I feel that a big leg down might be in the works (unless Bernanke gets to the choppa [which he should not do!!]). So I feel that even if gold goes through the roof, if the market tanks it will pull down everything around it, including the miners. So I'm in a little dilemma here, will the gold price jump enough to counteract the downside forces of mr. market on the miners? Of course the market might not go down at all, and gold might not go up, so feel free to let me know what you think.

 I hope these questions spark some good debate, and thank you all for reading!!

10 Comments – Post Your Own

#1) On August 19, 2010 at 9:27 AM, outoffocus (24.53) wrote:

Great questions. I'm interested in hearing the answers as well.  In the meantime I'd like to point you toward the blogs and articles of Christopher Barker aka TMFSinchiruna and silverminer who writes heavily on this subject.

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#2) On August 19, 2010 at 9:35 AM, Revler1082 (< 20) wrote:

Thank you outoffocus, I've been following Chris for quite some time. I love his articles and attention to detail. Hopefully he comments here :)

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#3) On August 19, 2010 at 10:05 AM, lemoneater (88.51) wrote:

I didn't know about gold being seasonal, but it makes sense. I tend to think of fertilizer stocks and semiconductor stocks as being cyclical based on demand. I'd be interested on how much of the gold demand is generated by India.  

Have a golden autumn--trees and gold:)

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#4) On August 19, 2010 at 10:08 AM, Revler1082 (< 20) wrote:

Caption associated w/ the chart:

 Demand is usually weakest in Northern Hemisphere summer, especially August when European jewelry manufacturers are essentially shut down. Demand is greatest going into fourth quarter, during which consumption is highest as gift-giving peaks beginning with Indian harvest and wedding festivals in autumn and carrying through US religious holidays and Chinese new year.

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#5) On August 19, 2010 at 11:15 AM, silverminer (41.99) wrote:

Hi Revler,

Great first post! I look forward to many more to come. :)

I think the seasonal effect is generally overstated, since in this new currency-driven environment for gold the demand is driven far more significantly by central banks, hedge funds, and very wealthy investors with the combined effect of muting the impact of seasonal variability in Indian retail demand. That is not to say it's not a contributing factor, or that it could not provide much of the impetus for a technical breakout here after this multi-month consolidation or even impact the decisions of those who may have waited through August in hopes of seeing lower prices ... but in general terms -- within this currency-driven secular bull market -- I believe the seasonal effect to be somewhat overstated.

What I do see this year, though, are myriad fundamental drivers poised to launch gold higher at the slightest provocation, and even a slight pick-up in retail demand could provide a spark. I sense a parabolic move looming for gold to $1,500 or higher, though I do not claim to know whether that is likely to occur next week or next year. The greater wisdom, if you have concluded that gold will move higher, is to wait patiently with your gold positions in hand. Many people will lose out trying to time gold's movements.

As for physical vs. miners... this is a complex topic. I maintain that the best precious metals investment strategy makes room for both. In fact, I advocate a four-tiered strategy for all but the smallest allocations to pms.

Permit me to close with an unpublished excerpt from my recent interview with Endeavour Silver's Bradford Cooke. He is confident that the miners are now poised to exhibit the leverage to price moves that has underlain the investment thesis for the sector for several years. I have consistently presented this same view, but here it is in Mr. Cooke's words:

........

CB: What advice do you have for investors looking into silver?

BC: I think everybody should have some exposure simply because they have returned to their historic function as the currency of last reort … as a hedge against economic strife … and as a currency of real value. A lump of gold, you know, doesn't change in value from year to year or century to century. A lump of gold is a lump of gold. It's how we measure -- what we use to buy and sell it -- that changes. Same with silver. Silver was used as currency for most of the 19th and a great chunk of the 20th century, and going back through the millennia in China. So these metals have returned to their precious nature.

My only advice for investors is that if you are a very conservative investor with a little bit of money to invest, then I would suggest the ETFs because they are the most liquid form and if you need the money you can get it in a heartbeat. For more aggressive investors, clearly, looking for some leverage to the price of metal, then you want to look to the larger producers. You're not going to get much Beta from the large producers, but at least you're going to have some exposure to growth. And last but not least, with the biggest bang for your buck but with the greatest amount of risk, is to be in the junior sector (the junior producers and junior explorers). And as evidenced by your investment in Endeavour from years ago, if you pick the right horse at the right time, wonderful things can happen. And I'm expecting another 3-5 years in the gold and silver cycle, and I'm certainly not alone in that view. So it's not late in the cycle; these stocks are not overpriced. In fact, if anything they're underpriced. And it would be good to have a component of growth in your portfolio as well. And that's Endeavour's story … we're focused upon growth in the silver business.

........

 

I had thought he made some reference to the underperformance of miners in recent years, and the fact that he felt that presented a likelihood for outperformance over bullion in the years to come, but that portion of our conversation may have taken place after I stopped recording. :)

Anyway ... that's my premise. The underperformance of quality miners in recent years is the very promise of outperformance to come. The investment thesis is not flawed ... low-cost producers really will deliver leverage to sustained price gains ... it's just that the massive volatility of the 2008-2009 corrective cycle delayed its realization.

Good luck, and remember ... no one can time this market; not even someone armed with charts of seasonal demand variability going back 1,000 years. :) The winning strategy is to get long and stay long until the fundamental landscape is meaningfully altered.

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#6) On August 19, 2010 at 11:30 AM, Revler1082 (< 20) wrote:

Whoohoo, Sinchi commented on my blog, suck it everybody, lol.

Thanks so much for taking the time to respond Chris. I understand that with all of the insane currency fluctuations and other things, that the value of gold has long been influenced by more than simple supply and demand, but I read somewhere that something like 60-70% of gold demand came from jewelery. With such a huge percentage I thought that the coming gift giving season would play a larger role.

 Could you comment on JAG? I recently green thumbed it after the big drop, and it seems like it has good potential, but after looking deeper I feel like the management is terrible.

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#7) On August 19, 2010 at 11:59 AM, silverminer (41.99) wrote:

Revler1082

That 60-70% figure would have been correct if it referred to 2007, but as the bull market has progressed, its percentage of identifiable global demand has diminished (first to 57% for 2008, and then to 50% for 2009). But that's global jewellery demand, and India's portion of that is only 25% of the 50%. India accounted for 19% of total worldwide net retail investment (coins and bars) in 2009, which is a very significant portion, but not enoug that its seasopnal fluctuations will provide a principle driving force behind the market.

I do not mean to suggest that seasonal variability of Indian jewellery and net retail demand is not a significant metric to monitor as a potential predictor of pricing strength, but merely that the rise of demand from sources like China (which I believe will oust India as the world's largest source of demand before long) is now every bit as important a trend in the overall demand picture. Those seasonal fluctuations in demand from India remain very important, just somewhat less significant than they used to be (and therefore occasionally overstated).

 

I bought a sliver of JAG on the big dip as well.  Agreed, their management bit the big one with a series of monstrous miscalculations, but having pored through quite a few drilling results from their exploration activities over the years, I will say that I continue to believe that they are sitting on a significant portfolio of high-grade ores that will untimately drive shareholder value in spite of management's shortcomings.

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#8) On August 19, 2010 at 12:27 PM, Revler1082 (< 20) wrote:

 silverminer 

I know that you aren't a market timer, but what do you think of the forecast for the next few months? I'm torn because all economic indicators are pointing down, but at the same time everyone is expecting a 2008 repeat, and markets rarely ever repeat themselves, let alone this quickly and with this many people waiting in anticipation.

Let me provide some context. I just recently turned 22, and I've got some money I'd like to invest. I really like commodities, especially the pms, but even more so agriculture. So I've got a pretty long term horizon, but if lower prices are assured in the near future, than I'd rather get in at a lower price.

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#9) On August 19, 2010 at 1:03 PM, ETFsRule (99.90) wrote:

I found this analysis to be very helpful... especially figure 4. Paul van Eeden used similar methods to show that gold was overvalued by about 25% in 2008 (he was right). Gold had a correction, but since then it has kept on skyrocketing.

Unfortunately I haven't been able to find a good plot of money supply vs gold price for 2009-2010.

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#10) On August 23, 2010 at 9:18 AM, Valyooo (99.82) wrote:

Silverminer,

Where did you get those percentages of where the demand derives from?  Not that I don't believe you I would just like to know where to find them myself to keep up to date on them.

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