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Four Fascinating Facts on Gold

Commodities / Gold & Silver 2009 Aug 14, 2009 - 04:03 PM GMT

By: Money_and_Markets

Commodities

Best Financial Markets Analysis ArticleSean Brodrick writes: The recent rally in the U.S. dollar has sent gold lower, dimming the hopes of gold bulls and putting fire in the bellies of those who say the yellow metal is just a “barbarous relic.” Maybe so. But I think the rally in the dollar is overstated, and gold is just taking a breather on a journey much higher.


To be sure, I have a bullish bias on gold … only because I see the mountainous long-term problems for the U.S. dollar getting bigger. As the dollar goes down, gold, which is priced in dollars, should go up. And the point is, what I’m really biased toward is making money. If I thought gold’s bull run was over, I’d go make money somewhere else.

Here are four facts on my radar … facts you might want to consider in your own judgment on gold …

Fact #1: Gold’s Bullish Season Is Approaching. Let me show you a seasonal chart of gold. It shows that, over the long term, the yellow metal usually puts in its lowest price performance in the summer months, then it takes off when the weather cools off.

Gold Futures Seasonal 32 Years

But what about more recent performance? Well, it turns out since the start of the big gold bull market in 2001, gold has put in its worst months in the summer. Its biggest rallies come in the third and fourth quarters of the year …

The autumn months are usually a very bullish time for gold … and for the miners that dig up the precious metal. We’re coming into that time of year now, and many cheap gold mining stocks probably are going to get more expensive.

Fact #2: Central Banks Are Selling Less, Not More, Gold. Last week, I told you that net official gold sales have plunged — totaling 39 metric tonnes, down a whopping 73 percent year-on-year. A one-time fluke? Not likely!

Going forward, the signatories to Europe’s Central Bank Gold Agreement (CBGA) have decided to sell LESS gold, not more. The banks have signed a new five-year agreement, lowering the annual limit on gold they could sell to 400 tonnes reducing the banks’ sales quotas by 100 metric tonnes a year. Any sales by the International Monetary Fund will be part of this limit. The IMF is planning to sell 403 metric tonnes over two to three years.

Fact #3: Producers Continue to De-Hedge. “Hedging” is when gold producers sell their gold production forward, locking in a price. They do it when they think prices are going lower. The last few years have seen gold producers de-hedge, or buy back their forward sales, at a furious pace, as they think gold prices are going higher.

Since many existing large hedge positions are already wound down, most analysts thought we wouldn’t see much more unwinding of hedge books. But the latest report from BNP Paribas Fortis Hedging and Financial Gold Report show that global gold hedge positions dropped by a larger-than-expected 1.2 million ounces (37 tonnes) in the second quarter of this year.

Most of the hedge-book unwinding came from AngloGold Ashanti (AU), which bought back 650,000 ounces in the second quarter and also announced it had reduced its forward sales by another 740,000 ounces in July after the end of the quarter.

A total of 31 companies reduced their gold hedge books in the second quarter.

Obviously, major producers don’t think gold prices are too high. Indeed, they’re positioning themselves to ride gold prices higher.

Fact #4: A Shortage of New Discoveries. Since 2000, the gold price has risen more than $600, yet the actual amount of gold produced has declined almost every year since then.

In fact, output dropped from 2,478 metric tonnes in 2007 to 2,416 metric tonnes in 2008, according to the GFMS consultancy, a London-based research group that serves gold mining companies and supplies the World Gold Council with its data.

Looking ahead, GFMS says that gold production will fall AGAIN this year to 2,302 metric tonnes.

It’s not for lack of looking. There are more than 2,000 junior mining and exploration companies listed around the world. Most are looking for gold. Maybe 1 percent of them are going to find a deposit that actually makes good money. The problem is simply that most of the large deposits that are cheap to mine have already been found.

Where Will Gold Go Next?

Not everything is bullish for gold. Many economic indicators are still pointing toward deflation, and most troubling is that gold ETFs are turning into net sellers of gold. But I think part of that is that investors are growing wary of paper gold. In these troubled times — and despite the big fat bonuses on Wall Street, things are only getting worse on Main Street — people take comfort in owning physical gold … and silver, too.

I was disappointed to see gold fail to break out above $1,000 recently, but a light-volume pullback isn’t that big of a worry for me. Gold is testing support around $942. If that breaks, there is further support around $927.50. Now THAT would be an interesting “zag” in gold’s big zig-zag path higher. If gold gets below $930, I think we could see buyers come out in force.

So, bring on a pullback in gold. Heck, get it down to $900 or even lower. That just gives people like me — investors with an eye on the long-term — a chance to scoop up gold at better prices.

And that goes double for the shares of great mining stocks. Sure, make them as cheap as possible — all the better to buy them on the cheap in the short-term. In the long-term, they’re probably going much higher.

What stocks do I like?

Small Foreign Miners and a Gold Mining ETF

I have some small foreign miners in Red-Hot Global Small Caps that are the cat-bird seat. They’re cheap, they have great projects with more coming online, and they are feeding right into the fastest-growing gold market in the world — China. China is VERY accommodative to gold miners.

An example is Sino Gold (SGX on the ASX, SIOGF on the pink sheets in the United States). It owns two operating mines with two more under construction. Its flagship Jinfeng project went from resource to the country’s second-largest gold mine in just six years. That speed can’t be matched by mines operating in the developed world.

Can Sino Gold be bought here? Sure. Just be aware that A) pink-sheet listings are illiquid and B) I told my Red-Hot Global Small-Caps subscribers when to buy Sino Gold, and I’m also going to tell them when to sell. If you’re buying on your own, do your own due diligence, and you’ll be taking your own risks.

For a basket of gold miners, you can always buy the Market Vectors Gold Miners ETF (GDX). Its diversity may not give you the oomph you can get from individual miners, but it will allow you to sleep well at night because a disaster at any one mine won’t ruin the fund.

So, keep your eye on the U.S. dollar — maybe it’s found a real bottom here, but history is against it. Keep an even closer eye on gold and select gold miners — a big pullback would be a golden opportunity to load up for the next rally.

All the best,

Sean

P.S. Remember, you can check out daily updates on my blog at http://blogs.uncommonwisdomdaily.com/red-hot-energy-and-gold/ and you can follow me on Twitter at www.Twitter.com/Seanbrodrick

This investment news is brought to you by Uncommon Wisdom. Uncommon Wisdom is a free daily investment newsletter from Weiss Research analysts offering the latest investing news and financial insights for the stock market, precious metals, natural resources, Asian and South American markets. From time to time, the authors of Uncommon Wisdom also cover other topics they feel can contribute to making you healthy, wealthy and wise. To view archives or subscribe, visit http://www.uncommonwisdomdaily.com.

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