“Are the Market Conditions Opportune for Gold Investing?” by Hassan Malik

8 Aug, 2014

“This is the first time since 2001 that gold and silver stocks have been reasonably priced. Not cheap. But reasonably priced in terms of the underlying economic projects at current gold prices.”

These were the words of Mr. Rick Rule, Chairman and Founder of Sprott Global Resource Investments, as he spoke with SmallCapPower.com in a recent interview (watch it here). His words seem to be a call for investors to carefully scrutinize the gold investing world. In his interview, he discusses that precious metal prices have only ever been reasonably priced twice in his career and both times they were indicators for investors to take action. But Mr. Rule’s words were just that – they were words. Investors should always do their own lengthy due diligence before looking into investing. So the question begs to be asked: Does the market reflect opportune conditions for gold?

The answer is likely “yes.” The market is quite favorable for gold for a number of reasons. Primarily is the growing influence of Russian troops on the border of Ukraine. Simply put, the increase in Russian involvement with the Ukraine border has put investors on edge. Add to the phobia the recent Canadian sanctions on Russia accounts for investors seeing certain stocks as risky and selling them for a safer option (gold and bonds). This of course contributes to a rising gold price. On Wednesday, the TSX gold sector was up about 1.6%. The S&P/TSX composite index rose 14.38 points to 15.202.09. This accounted for investors pushing the December bullion ahead US$22.70 to US$1,306.70 an ounce. What we are seeing is an array of external geopolitical issues affecting the price range where gold is currently operating in.  Since mid-June, investors have seen gold fluctuate in the midst of tensions in the Middle East as well as Ukraine. The cherry on top was really speculation over U.S. interest rates. Some data would hint at a higher interest rate, making gold fall while the aforementioned macro issues would accelerate price. 

As of Thursday, buying has stagnated in compliance with prices trading at north of $1300 an ounce. Speculation is really the main proponent behind a sluggish summer. Investors are expecting the prices to drop in the coming months and are holding off purchases for the immediate future. According to CNBC, holdings SPDR Gold Trust, which is the world’s largest gold-backed Exchange-Traded Fund fell 2.4 tons to 797.55 tons yesterday.

Speculation isn’t only coming from investors. On the contrary, what we are seeing are precious mineral analysts predicting the opportune and idealistic conditions in which gold will thrive. Commodity strategists Mr. LaForge and Mr. Pies highlighted that low gold volatility and a declining interest rate may be the right recipe for higher gold prices. On a blog on Barron’s, both Forge and Pies collectively wrote that low volatility in gold prices has meant good things for investors. It is high volatility that is bad for gold. This year, the prices have been very closely bracketed between a certain range. The duo also details that gold has traditionally been a “haven trade” in the sense that investors usually turn to gold post unfavorable stock conditions.

The bottom line boils down to one factor. Speculation. No one can say for certain when the exact appropriate time to sell or buy would be. If we look at the situation in Ukraine, it is clear that right now people are opting out of stocks and investing in gold and bonds but who is to say that conditions won’t improve next week? How many days or weeks the tensions will endure is really anybody’s estimate. 

Disclaimer: This article was posted with the permission of a third-party contributor and the opinions contained therein do not necessarily reflect those of Smallcappower. Smallcappower does not endorse any investment advice provided by these third-party contributors.

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