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Chart of the Week – Season for Metals
September 02, 2010
Yesterday kicked off what has historically been the strongest period (September through December) of the year for mining stocks and gold. We discussed this back in August (Ready, Set, Gold!) but if you were out enjoying a family vacation, don’t worry you probably haven’t missed the opportunity.
Research from Barry Cooper at CIBC shows that while gold has historically performed well in September—prices have risen 81 percent of the time over the past 20 years—those investors who held their investment through the end of the year reaped the most benefits.
CIBC measured the performance of gold stocks over the past eight years for two time periods: August 20-September 20 and August 20-December 31. The shorter period netted a gain of 12 percent while holding the latter gained 28 percent.
Seasonal patterns are strong for gold but what about base metals?
This chart from Desjardins Securities shows the percentage change for the TSX Mines & Metals Index during the last four months of the year. Like gold, this base metals index has increased 10 of the past 12 years during the September-December period, with a median gain of 7.5 percent.
If you throw out the extreme years—up 50 percent in 2003 and down 68 percent in 2008—then the average increase rises to 10.5 percent.
Although these seasonal patterns have been strong for some time, it’s important to remember that they’re never 100 percent. However, they can be used to increase our probabilities of making the right investment decisions.
The S&P/TSX Capped Metals and Mining Index is a capitalization-weighted index.
Mastering Asset Allocation
September 01, 2010
The legendary investor Sir John Templeton had high praise for Roger Gibson, saying “he guides investment advisors through a logical process for making important asset-allocation decisions.”
Harry Markowitz, who won the Nobel Prize for inventing modern portfolio theory, says Roger’s book, Asset Allocation: Balancing Financial Risk, “presents individual investors and their investment advisors with a balanced, professional view of the investment process.”
Don Phillips, who heads fund research for Morningstar, goes even further, saying Roger is “without a doubt the best and most articulate voice on the subject of asset allocation today.”
You can hear that articulate voice by joining us for a free webcast with Roger Gibson.
The webcast title is “The Role of Commodities in Asset Allocation,” and it will take place on Thursday, September 9, at 11 a.m. Eastern time. Register here.
Commodities have been gaining acceptance as a permanent asset class, and during the webcast Roger will show you where commodity-linked equities can fit into a portfolio to provide diversification while managing volatility.
The webcast is intended to deliver news you can use, so I hope you will be able to join us on September 9.
Diversification does not protect an investor from market risks and does not assure a profit.
Gold Rushing On
August 25, 2010
The World Gold Council’s latest quarterly recap of the gold market confirms much of the big-picture story we already knew: demand is strong (up 36 percent from a year earlier), supply is not keeping pace (up 17 percent), and global economic worries are driving investors toward gold as a safe haven.
Drilling down a little further turns up a number of interesting points:
- Investment demand in the second quarter of 2010 (red bar in the chart) more than doubled compared to the same period in 2009, and accounted for more than half of total global demand. Investors bought the most gold since the first quarter of 2009, at the depths of the Great Recession.
- Demand from exchange-traded funds rose more than 400 percent to about 291 metric tons (9.4 million troy ounces), and retail investors bought about 30 percent more bars, coins and gold in other forms.
- Industrial demand is approaching pre-recession levels. The WGC credits the growing popularity of new consumer devices like iPads, Kindle electronic readers and netbook computers with driving this trend.
- Jewelry demand is down only slightly year-over-year, even though the gold price has risen from the $900+ per ounce range to $1,200 per ounce. In Hong Kong, for example, jewelry demand rose more than 30 percent in physical terms and nearly 80 percent in U.S. dollar terms.
The WGC says it foresees strong gold demand through the end of 2010, with India and China leading the way, along with concerns about economic recovery and the massive sovereign debt loads in Western Europe and elsewhere.
So far, August has been an unusually good month for gold – as of midday today, the price is up 6 percent this month, where historically the August price tends to rise only 2.5 percent above July.
We recently wrote about gold seasonality – September, just a few days away now, is on average the best month for both gold and gold equities. Learn why September means ready, set, gold!
We also have written about gold in the context of the global economic uncertainty and also about China’s important role in future gold demand.
Gold and Deflation
August 16, 2010
I have been speaking and writing about gold’s appeal in a deflationary environment – this is a concept that opposes the conventional opinion that the gold price will not rise without inflation.
Those who cling to that singular gold-inflation relationship have not examined the history of gold as money. Whenever there is substantial inflation or deflation, governments tend to either be too slow to react or they overreact with policies, and this is typically good for gold.
Interest earned on 90-day Treasury bills below the inflation rate is a signal for governments to try to stop deflation and reflate the economy. When this happens, gold becomes attractive. We are in such an environment now.
During these periods, governments usually need to increase their deficits by escalating their borrowings to support the economy. This also supports gold as safe money in addition to its beauty as jewelry.
The twin engines of negative real interest rates and government deficits tend to make gold a very attractive investment. Recent research supports our historical findings on what drives gold.
This chart from Deutsche Bank shows that for the past four decades gold (and silver) have performed well in a country’s currency when that country has low or negative real interest rates.
The Federal Reserve’s main interest rate is near zero and inflation is a little over 1 percent, so we now find ourselves in a negative real interest rate situation. The Fed has made it clear that it has no plans to tighten money by raising that key rate any time soon because of the sluggish economy and soft housing market (mortgages are now at a 21-year low), so this condition is likely to endure.
“The decline in core inflation from 2.5 percent two years ago to under 1 percent today will sustain market fears of deflation and hence a more rapid depreciation of the U.S. dollar to arrest any deflationary pressures,” Deutsche Bank’s analysts wrote. “We believe that the road map to resolve deflation is therefore bearish for the U.S. dollar and another factor which will propel gold prices to new highs.”
The Fed this week plotted part of that road map – it said it will pump more money into the system to try to kick up economic activity. As the 2010 midterm election draws closer, there is also a growing call for another round of stimulus spending to try to pull down the 9.5 percent unemployment rate.
Such a move would widen the federal budget deficit, which is already estimated at nearly $1.5 trillion for this year and will roughly be the same in 2011. The U.S. dollar is not only our currency, it is also the world’s reserve currency. Deficit spending puts downward pressure on the dollar, and when the dollar falls, investors tend to turn to gold.
When you add the interest rate and deficit scenarios to the gold seasonality trend – September is historically the best month of the year for both bullion and gold equities – the conditions now appear promising for gold.
We discuss What’s Driving Gold in an interactive presentation – click on the chart to learn more about these critical drivers.
Browse Our What’s Driving Gold Matrix
Ancient Gold, Modern Value
August 12, 2010
A 2,200-year-old gold coin was found recently in northern Israel. No, this isn’t one of those radio commercials you hear all the time about a surprising discovery of a stash of rare gold coins in Europe. This is the real deal.
Archaeologists from the U.S. uncovered the gold coin while digging near the border of Lebanon. At nearly one ounce in weight, it is the heaviest and most valuable coin ever found in Israel, a state official said. And somewhat oddly, the official added that the coin served a symbolic function and wasn’t used as currency.
The coin dates back to 191 B.C., making it older than the Roman Empire, but gold's history goes much further back than that.
The Sumer civilization in ancient Mesopatamia used gold for jewelry and ornaments for headdresses, and thousands of gold artifacts were found in the Varna Necropolis, a gravesite in present-day Bulgaria that goes back to 4600 B.C. Egyptians are believed to have mined gold as early as 2000 B.C.
It’s believed gold as money originated in China about 3,000 years ago, and that the first pure gold coins came from King Croesus of Lydia between 560 and 547 B.C.
Over the millennia, gold’s prices have changed but its intrinsic value as a store of wealth hasn’t. During these uncertain economic times, it seems that more and more investors are appreciating gold’s protective properties.
Net Asset Value
as of 09/02/2010
- Global Resources Fund
PSPFX $8.72 +0.08 - Gold and Precious Metals Fund
USERX $17.25 +0.18 - World Precious Minerals Fund
UNWPX $19.21 +0.13 - China Region Fund
USCOX $8.50 No Change - Eastern European Fund
EUROX $9.05 +0.03 - Global Emerging Markets Fund
GEMFX $8.15 +0.01 - Global MegaTrends Fund
MEGAX $7.67 +0.03 - All American Equity Fund
GBTFX $19.86 +0.15 - Holmes Growth Fund
ACBGX $15.79 +0.19 - Tax Free Fund
USUTX $12.61 No Change - Near-Term Tax Free Fund
NEARX $2.27 No Change - U.S. Government Securities Savings Fund
UGSXX $1.00 No Change - U.S. Treasury Securities Cash Fund
USTXX $1.00 No Change