The time is right to buy gold & gold stocks

A number of factors appear to be converging that makes this an excellent time to begin buying gold and gold stocks. In order to capitalise on this opportunity the 247Bull portfolio is now beginning to deploy cash into the sector.

Gold has bottomed

After a nine month period of sideways consolidation following its parabolic spike last summer, the gold price looks to have made a significant bottom.

An 18 month chart of gold

Chart courtesy of stockcharts.com

On three occasions the gold price has fallen to around $1,525 and on each occasion it has found strong support. I wrote last month about how this ‘triple bottom’ chart pattern could prove to be very bullish for gold, and so far that scenario looks to be playing out.

Gold equities are now available at distressed prices

Gold equities, as illustrated by the HUI Gold Stock Index, have also bounced but are still available at considerably distressed prices.

An 18 month chart of the HUI

Chart courtesy of stockcharts.com

Back on 21 May I noted that Gold stocks were at, or near, the ‘puke point’ saying that “It takes a strong understanding of the fundamentals and considerable courage to buy at a time like this, but those that do will be richly rewarded.” Since then the HUI index has risen by 13%, however over the next 18 months I expect the HUI to increase by at least another 50% from the current level of 452.

Buy the dips

There is an old adage on Wall Street that “in a bull market you should buy the dips”, and this has certainly proven to be good advice in this bull market. In the twelve months following the last big correction in 2008, gold rose 49% and the HUI rose 154%, and this correction is certainly comparable to that one.

More QE on its way soon

As I’ve argued before, the scene is set for more QE, particularly from the Federal Reserve which is likely to act if or when economic conditions worsen.

Only yesterday the Federal Reserve’s chairman, Ben Bernanke, stated that, “We are prepared to take further steps if necessary to promote sustainable growth and recovery in the labour market”. His statement came at the end of the Fed’s latest two day meeting at which the Federal Open Market Committee (FOMC) announced that it would extend its Operation Twist programme – which involves swapping short duration government bonds for longer duration ones – until the end of the year.

In terms of the announcement of more stimuli, markets are now looking ahead to the EU summit which takes place 28-29 June, and the next FOMC meeting which beings 31 July. To me it’s not a question of if we see more money printing, it’s only a question of when.

US dollar will be target of more QE

Gold’s recent weakness can be attributed in part to the substantial rally in the US dollar that began back in May 2011. The dollar’s rise has been fuelled by a rush out of the euro into perceived safe havens, and because gold is denominated in US dollars, when the dollar rises, all other things being equal, the price of gold falls.

An 18 month chart of the US dollar index

An 18 month chart of the US dollar index

Chart courtesy of stockcharts.com

When the Federal Reserve does launch more QE I expect the dollar’s uptrend to reverse. The US central bank, along with those of most other G20 nations, is keen to weaken its currency to help boost exports.

Putting money to work

In order to capitalise on this excellent setup I have begun deploying cash into physical gold, selective gold equities, and a gold equity fund.

The 247Bull portfolio

The 247Bull portfolio - 21 June 2012

 

Portfolio as at 21 June 2012

The physical gold in the 247Bull portfolio has been purchased using GoldMoney which stores your physical gold for you in allocated form in its vaults, in exchange for a small fee. This is important because the purpose of owning gold is as insurance, portfolio insurance or wealth insurance. Gold is the asset that protects the rest of your portfolio from a host of systemic risks and as a result I have chosen to own physical gold outside of the banking/ financial system rather than by simply buying an ETF (Exchange-Traded Fund) such as GLD.

Gold is no one else’s liability whereas a gold ETF is a paper derivative of gold designed to reflect its performance. ETF investors are exposed (often unwittingly) to a host of risks, from movements in the Foreign Exchange markets, to there being multiple claims on the same metal – exactly the sort of risks you are trying to avoid when owning gold.

The companies that have been purchased are Newmont Mining Corp. [NYSE:NEM], Goldcorp Inc. [TSE:G], Royal Gold, Inc. [NASDAQ:RGLD], Gold Resource Corporation [NYSEAMEX:GORO], New Gold Inc. [TSE:NGD], Franco-Nevada Corporation [TSE:FNV], and the gold fund that has been purchased is Black Rock Gold & General Fund.

Most of these companies, and the fund were mentioned in the article The perfect portfolio part II: Bargain hunting in the gold sector, however I will profile each in more detail in the coming weeks.

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