Another Case for Gold

"All that is gold does not glitter, Not all those who wander are lost;
The old that is strong does not wither, Deep roots are not reached by the frost.
From the ashes a fire shall be woken, A light from the shadows shall spring;
Renewed shall be a blade that was broken, The crownless again shall be king." - J.R.R. Tolkien, The Fellowship of the Rings

I know, I know everyone hates gold as an investment or at least they do in the United States.  You cannot use it, you cannot eat it, it does not produce a stream of cash flow, it is essentially a worthless glittering piece of jewelry or, worse still, a glittering piece of metal that takes up a lot of space in the family vault.  There is absolutely no economic benefit from owning gold so dump it like a hot coal!  This is certainly the consensus in the United States where gold stocks and gold ETFs have been bludgeoned for the past two years.  Year to date the price of gold is down 25% and the price of the mining stocks is down almost 50%.  This is a massive sell off and is very interesting given the fact that the stock market is up over 25% during the same time.  Gold haters rule the roost in the United States and so far, based on the performance of the stocks, it appears that their arguments listed above are correct.  So is there a reason to snoop around the gold market or should you shun it forever?

Now as most of you probably know I am bullish on gold and with this current sell off (or should I say massacre) I am even more convinced that the market has once again overdone the selling and that the opportunity to make a roaring profit in gold related stocks is enormous.  The first reason is obvious, when everyone hates an industry or an investment it is normally the exact time when you should be loading up.  Now that is not a very scientific reason so let's take a look at some more fundamentally sound investment metrics.

The price of gold is determined exclusively by supply and demand.  Over the years the supply of gold being mined has been dropping while the demand for gold has shifted to India and China.  China is expected this year to overtake India as the world's largest consumer of gold.  It is expected that China will purchase over 1,500 metric tons of gold while India will purchase around 1,000 metric tons.  The combined total of more than 2,500 metric tons is more than the amount of gold mined this year which is expected to be around 2,400 tons.  So demand for gold outside of the United States is huge and growing and this demand is being met by selling in the United States.  In fact the gold ETFs have sold almost 800 metric tons of gold this year alone.  Now investors are notoriously fickle and if their desire for gold returns they will soon find that there is no supply, skewing the supply demand equation to the demand side and forcing the price to sky rocket.

So what will change their minds?  Gold is reliant on the two investor hot buttons of greed and fear.  Although gold is also thought to be a hedge against inflation there are numerous studies that have shown otherwise so for now I will take that argument off the table and focus on the raw human emotions.  Right now fear has left the building and when that happens greed runs rampant.  In this type of a market environment stodgy old mining stocks and gold are shunned in favor of new technologies and high flying momentum stocks.  This is being played out in the market today.  At some point in time, as I have been saying for too long now, fear will re-emerge and with the fear will be a return to gold and gold stocks.  When this will happen is anyone's guess but it is my opinion that now is the time to add a decent allocation to your gold holdings and if you have none to look at dipping your toes in the water.  Not only will this investment serve you well when the market craters it should provide a good diversification option that will protect you when fear returns.