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Durable gold's hold for long-term investors
June 2, 2011 / 8:46 PM / in 6 years

Durable gold's hold for long-term investors

<p>A worker scoops gold shots at Japanese jewellery brand, Ginza Tanaka's original equipment manufacturer (OEM) factory in the Chiba prefecture, east of Tokyo September 14, 2009. REUTERS/Yuriko Nakao</p>

NEW YORK (Reuters) - Gold has hit record highs this year at a time when a double-dip recession threatens the global economy and governments everywhere are pulling back from the spending binges used to blunt the 2008 financial crisis.

Austerity and economic slowdown hardly seem like strong arguments for buying an inflation-sensitive precious metal.

Still, gold bugs are bullish as ever. And some are predicting the metal will rise to $2,000 an ounce over the next year, nearly a third above the present level.

“The reasons for buying gold haven’t diminished,” said Jeff Clark, the Sacramento, California-based senior precious metals analyst for Casey Research. “Unless we change course of how we handle the debt and deficits, there is a good reason to buy gold.”

The pervasive bullishness stems from lessons learned in the financial crises of the past decade.

Gold does have staying power during big fiscal dramas and financial meltdowns. Discredited as a serious investment during the stock market boom years, it’s regained its shine at the worst of times over the past decade. It’s especially attractive when the dollar declines, as it has been wont to do in the current era of fiscal imbalances.

But even if it has earned a place in portfolios, gold poses challenges: What form should you buy it in? And when should you buy it?

THE LONG RISE

Skeptics have called for a pullback at regular intervals -- and still it stands tall: Gold has appreciated 500 percent since mid-2001, a 17.5 percent annualized return. The top-performing U.S. mutual funds of the past decade had invested directly or indirectly in the metal which Cortes carried back from the New World by the boatload.

A deepening budget crisis in Washington has gold sailing high again in some buyers’ dreams. The reason? A budget crisis could trim the currency further. Gold’s strength comes largely from the erosion of the dollar, which has lost 37 percent of its value since its last peak in mid-2001.

And investors haven’t missed the boat.

“Definitely still time and there always will be ‘still time’” to buy gold, says Al Korelin, chairman of AB Korelin and Associates in Semiahmoo, Washington. “You buy gold as insurance and not necessarily as a short term investment.”

Spot gold was last at $1,532.99 an ounce, down but not far off the May 2 record high of $1,575.79 an ounce, according to Reuters data. It fell later that day after news of the death of al Qaeda leader Osama Bin Laden.

HOW SOON TO $2,000?

Commodities often hesitate at key price points, owing to the heavy use of leverage in futures accounts and heavy reliance on stop-loss orders linked to key price points. Which begs the question: When might gold rise from its current peak to the next lofty level?

“Gold will eventually go up to $2,000 an ounce,” said Mike Frawley, global head of metals at the Newedge Group in New York, though “probably not much before early next year.”

Frawley said the price of the currency now has backing based on supply and demand fundamentals. But the currency factor could swing back into play.

“The value of the dollar vis-a-vis other major world currencies is considerably important,” he said. “Global demand (for gold) is still strong from Asia Pacific, India and China in particular.”

CitiFX Technicals, a note from Citigroup, said gold could test an all-time high in the weeks ahead, top $1,700 this year and rally to more than $2,000.

Todd Horwitz; the Chicago-based chief strategist for the Adam Mesh Trading Group is waiting for the metal to top technical resistance. “I would not become bullish on gold until it made new highs over $1580.”

BULLION VS MINING SHARES

For investors who think gold is heading on another run, the pure play, bullion, is an option. The physical product is not hard to acquire.

Casey Research’s Clark said investors should avoid gold bars, half ounce bullion coins or rare gold coins and stick to the well-known one ounce gold coins like the American Eagle or Buffalo, the Canadian Gold Maple Leaf or the South African Krugerrand. Better-known gold instruments are better to have when it comes time to sell, Clark says.

Buying the metal, as opposed to the shares or producers, has distinct advantages, Clark says. That’s because companies carry the risk of bad management, inaccurate accounts of deposits and the costly pitfalls of mining.

On the other hand, buying bullion will entail storage and security costs whether you hold it at home, in a safety deposit box or at a managed storage facility.

However, others say buying the shares of producers is more productive.

“You should put up to 10 percent of your capital in the bullion, 55 percent in the senior producers and the remaining 35 percent in the smaller companies,” says AB Korelin’s Korelin.

His suggested senior producers are Goldcorp Inc., Newmont Mining Corp. and Kinross Gold Corp..

Two favorite junior companies are International Tower Hill Mines Ltd and Extorre Gold Mines Ltd.

BUYING GOLD BELOW THE SURFACE

Bill O‘Neill, partner of commodities investment firm LOGIC Advisors in Upper Saddle River, New Jersey with $200 million in total assets, says he is cautiously optimistic on gold.

The firm continues to be heavily involved in the producers as gold in the ground is cheaper than the spot price for bullion, he says.

Given the associated costs to store and secure the bullion, he said LOGIC isn’t a big advocate of bullion, instead favoring the low cost scenario of ETFs such as Blackrock’s iShares Gold Trust and the SPDR Gold Trust, the world’s largest gold-backed exchange-traded fund.

Buying the physical metal would only be to protect against a global monetary system collapse, he said.

But whether waiting for a strong technical signal, the dollar to fall further or U.S. political gridlock on deficit reduction to signal further gains ahead, the overwhelming consensus is that gold is going higher.

”Look at what the Chinese are doing in buying more precious metals,“ says AB Korelin’s Korelin. Are they stupid?”

Reporting by Nick Olivari; Editing by Richard Satran and Bernadette Baum

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