Managing Expectations: Why Gold Should Thrive
by Frank Holmes
by Frank Holmes: Gold
and China: Where the Bulls and Bears Square Off
It was a challenging
week for gold investors. Although the yellow metal has been on a
spectacular 11-year bull run, recent strength in the economy has
some thinking gold's heyday is over.
As I often
say, investing, like life, is about managing expectations - even
throughout gold's decade-long rise, price action over the short
term can go both ways. It helps to look at what happens after short-term
drops. For example, looking at the past decade of one-day 5 percent
declines in gold, you can see that this event is pretty rare. In
2006, gold dropped more than 5 percent in a day only two times.
In 2008, there were three such events. Another one occurred at the
end of this February.
The 1.7 percent
drop experienced over the past month shouldn't surprise gold investors
given the seasonal pattern for gold. Whereas gold rises nearly 2
percent in both January and February, over the past 11 years, it's
been a non-event for gold to correct in March.
it's a good reminder that bullion has historically been less volatile
than the stock market: the 12-month rolling volatility over the
past 10 years for gold was 13 percent. For the S&P 500 Index,
the 12-month rolling volatility over the same period was 19 percent.
there seemed to be one main driver eight thousand miles away negatively
affecting gold prices. I often say that government policy is a precursor
to change, and fiscal policy strongly affected the Love Trade in
India last month. To trim its current account deficit, India's finance
minister proposed doubling the customs tax on the precious metal.
It was soon reported that jewelers closed shops in protest.
As a result,
gold imports into the world's largest gold market fell 55 percent.
It's not the
customs tax that has the gold shops boycotting, says UBS Investment
Research firm. Jewelers' "prime gripe is with the new 1 percent
excise duty on unbranded jewelry" leading to a greater recording
of gold transactions, which means more regulation and red tape.
What's so egregious to jewelers is the excise tax will be retroactive
so those shop owners holding old gold stocks will have to pay duty
on those as well, says UBS.
I believe this
is only a temporary sell-off for India. As I often discuss in my
presentations, traditional festivals and holidays drive gold
demand in India because of their strong history with gold. With
their love for the yellow metal, Indians hold the belief that gold
"will perpetually rise," although there are certain buyers
that wait for a "psychologically important $1,600 level,"
keeping in mind the strength of the rupee, says UBS.
While the seasonal
Love Trade period for gold generally falls between August and February,
an important holiday is coming up which has historically driven
higher sales of gold. Akshaya Tritiya festival occurs on April 24
this year. This is an important occasion for Hindus, celebrated
annually in late April or early May, depending on the Hindu calendar.
Buying and wearing of gold jewelry is important on this day, as
UBS says it's one of the two "biggest gold buying events"
in the Hindu calendar. The second event is Dhanteras, which occurs
during the peak seasonality period for the yellow metal.
is this festival for the gold market? UBS analyzed the buying data
from India last year when Indians celebrated Akshaya Tritiya festival
on May 6. It found that "physical sales to India peaked four
days beforehand." Also, "sales were consistently above
average for 13 working days" before the festival because local
banks and jewelers restocked their inventory.
need to change to help sales in India this year, warns UBS. The
firm says the jewelers' strike needs to end, and, according to one
local who talked with UBS, it would help gold sales if the price
of oil would reverse - this would "relieve some of the current
account pressure and perhaps allow for more flexibility with regard
to gold imports."
change over the long-term is Indians' gold-buying behavior: Indians
"have an extensive cultural tie to gold" and this "is
not changing," says UBS.
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Frank Holmes is chief
executive officer and chief investment officer of U.S. Global Investors
Inc. The company is a registered investment adviser that manages
approximately $4.8 billion in 13 no-load mutual funds and for other
advisory clients. A Toronto native, he bought a controlling interest
in U.S. Global Investors in 1989, after an accomplished career in
Canada’s capital markets. His specialized knowledge gives him expertise
in resource-based industries and money management.
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