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Return of artifact from grandpa gold { October 5 2005 } Original Source Link: (May no longer be active)
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Why gold is gleaming again
Wednesday, October 05, 2005
With gold at 17-year highs, patient investors will be rewarded by buying on the next big dip. Here's how to go prospecting in the modern marketplace.
The price of gold has risen to 17-year highs lately, conjuring giddy dreams among the bunker-and-canned-beans crowd that Armageddon is just around the corner.
Yet among most investors, the ascent of gold to levels not seen since the Reagan administration has been a big yawn. The ore is widely considered an artifact of another era, a crock at the end of their grandpa’s rainbow. Let’s just say the radio talk shows aren’t exactly lit up with angry callers calling for a tax on the windfall profits of gold miners.
If gold goes much higher, though, it’s going to start making the nightly news, and maybe even the cover of a news magazine. Then it will begin to dawn on equity investors that something really important is happening, and that it might just be worth the effort to branch out from the straightforward earnings-and-economics world of stocks and into the supply-and-monetary policy world of precious-metals trading.
By the time most arrive, it will be time for gold to reverse, of course, by as much as 15%, in step with higher U.S. interest rates and the dollar. Over the next 12 to 36 months, though, after the Federal Reserve is done raising rates, it could go much, much higher. With so much rootless capital roaming the world in search of the next big trade, in fact, it wouldn’t take much a spark of love from the world’s new legion of momentum-oriented hedge funds to push this thinly traded market to levels well beyond the $800 bogey of the early ‘80s if inflation, sentiment and consumer-demand harmonize.
In gold we (sometimes) trust
Gold is as much about investors’ state of mind as it as about the status of mines. It is a set of beliefs and a world view as much as it is a shiny, malleable metal to wear around your neck, or pound into coins, or stow away in a safe-deposit box. When the stock market and real estate are performing well, gold seems too abstract to bother with. It is only when sentiment for equities and the dollar turn more bearish that precious metals begin to shine.
Since the intrinsic value of gold is a real mystery to most people -- it doesn’t have a P/E multiple, and doesn’t seem essential to everyday life -- it goes through historical cycles of lust and indifference. In recent months, it has decoupled from its inverse relationship with the dollar -- moving higher even as the dollar has advanced due to improvements in the demand-supply balance. My guess is that while now is not the time to chase it, patient investors will be rewarded by buying the next big dip either via the futures market or through the shares of gold-mining companies.
I’ll have a few suggestions along those lines in a moment, but first a little background.
What does set gold apart from everything else you can sink your hard-earned money into?
For one thing, while gold is not particularly rare, its supply is finite. For another, unlike stocks and bonds, it has been considered a store of value for more than 2,000 years. The gold bugs will tell you that an ounce has bought a man’s suit since the loincloth era. (Depending on where you shop, of course.) But the point is that regardless of whether a country’s currency is priced in dollars, lira, Reichmarks or cockleshells, during frightful moments of value destruction -- such as periods of hyperinflation, war or natural catastrophe -- gold has been acknowledged as a medium of exchange.
The theory is that if terrorists knock out the global ATM network, it would be easier to trade a gold coin for five sacks of flour than, say, a personal check decorated with a sailboat silhouette.
Like oil and gas, gold is hard to find, hard to coax out of the ground, and harder still to refine into usable form. Moreover, it is not exactly located out in the open in some Kansas cornfield. Through quirks of geology, most of it happens to be concealed deep in the earth in places as remote, and sometimes unstable, as the jungles of Ghana and Brazil, the deserts of Nevada and Mongolia, and the mountains of Kyrgyzstan, Turkey and South Africa.
The forces of greater scarcity
And while in days gone by a prospector could start hacking away at his claim with a pick and hammer, today local politicians and nongovernmental organizations are teaming up to prevent the environmental damage that mining wreaks on animal, native and forest habitat. The main complaint of the industry -- outside the rising price of energy and difficulty of finding good mining engineers and securing supplies of special equipment -- is the burden and cost of battling bureaucracies over strip mines, labor practices and toxic chemicals.
At the end of the day, the price of gold, like anything else, goes up when buyers are more aggressive than sellers, particularly when supply is constrained. Whether you think marginal new demand is coming from a central banks and private citizens hedging against incipient inflation, or from the jewelry aspirations of China and India’s swelling middle classes, the bottom line is that the long-term trend is up, even if there’s a long lull in the action before the next leg higher.
There are at least four ways to take action. The most direct way to go long or short gold is to open a futures trading account at either a major commodity trading firm like Refco or at an independent firm like Prospector Asset Management in Illinois, run by industry veteran Leonard Kaplan. The advantage of buying or short-selling futures is that you are not dependent on the whims of mining company executives’ hedging or management skills, or on local permitting problems, or labor disputes. You can make a pure two-year bet on the direction of gold by putting up as little as 3% of the value of your account: You could buy one contract, which is 100 ounces -- controlling $46,600 worth of physical gold -- for as little as $1,350. Now that’s leverage.
Moving down the risk spectrum, you could buy the shares of a small-cap mining company with good prospects. Scotia Capital analyst Michael Durose has outperform ratings on so-called “junior gold” outfits like Golden Star Resources (GSS, news, msgs), which has West African properties; and Agnico-Eagle Mines (AEM, news, msgs), which mines in Quebec and has programs in Mexico and Finland.
Next come the larger mining companies, such as Newmont Mining (NEM, news, msgs), Barrick Gold (ABX, news, msgs) and Placer Dome (PDG, news, msgs), which tend to go up and down together, with a slight edge given to the first two by most analysts. And finally, you can buy shares of a gold-tracking exchange traded funds, such as StreetTracks Gold Trust (GLD, news, msgs), or mutual funds such as Fidelity Select Gold (FSAGX, news, msgs) or Tocqueville Gold (TGLDX, news, msgs).
Whichever you choose, keep in mind that buying or selling gold is just a trade like any other -- not a mission, or a even an investment. Don’t try to earn a bronze star for heroism if it goes against you.
Fine Print
To learn more about gold mining, visit the Newmont Mining Web site. The Barrick Mining Web site also has a lot of useful information about gold. If your spend a lot of time investigating gold stocks, you will roam the world. Check out the Bema Gold Web site or the Golden Star site to see what I mean. Refco is one of the largest commodities brokers. Check out the Refco Web site to learn more about how to open an account. Beware of using the sort of leverage that I mentioned above, though. It’s great when your trade is going the right way, but it’s a killer when the trade moves against you. With that much leverage, a wrong-way move of just a couple of points can result in a game-over margin call.
Jon D. Markman is publisher of StockTactics Advisor, an independent weekly investment newsletter, as well as senior strategist and portfolio manager at Greenbook Investment Management. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at jon.markman@gmail.com; put COMMENT in the subject line. At the time of publication, Markman did not own or control shares of companies mentioned in this column.
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