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Gold has been considered the “ultimate store of value” for centuries. In a world where the governments of developed countries, as well as their central bankers, have become increasingly adept at guiding their economies through sometimes the most turbulent economic and financial storms, the “last defense” against financial disaster The role of gold in form is becoming increasingly important. A historical curiosity rather than something that should influence the decisions of many investors today. The exception is those die-hard gold bugs, including some who still yearn for a return to some sort of international gold standard, whereby all currencies are pegged to, or backed by, gold.
However, over the past few years, it is true that gold has seen something of a resurgence. This was partly due to the growing demand for gold jewelry in developing countries such as India and later China, but also partly due to geopolitical instability, which forced the country to rule with its geopolitical influence during the Cold War years. has given rise to uncertainties of a more complex and fluid nature than those Terrible, yet ironically stable, standoff between the two superpowers based on fear of mutually assured destruction. There is also some evidence that recent buying and formation of physical gold by gold-linked exchange-traded funds (ETFs – see below) has also helped to drive gold demand.
Direct investing in gold can be done through the purchase of bullion, coins, jewelry, and other physical forms of the precious metal, but for all but small amounts it brings with it the inconvenience and risk of storage and security. For the investor or trader, shares of gold mining companies provide an excellent way to speculate on future movements in the price of gold or take a hedged position. Stocks such as Newmont Mining (NEM), Barrick Gold (ABX), Agnico-Eagle Mines (AEM) or Goldcorp (GG) are quoted on the New York Stock Exchange. (However, the last three of these are Canadian-based companies).
While gold mining stocks represent shares in corporations and therefore their individual price movements reflect news that is specific to the individual company, as a group their share prices generally closely follow gold prices. obeys from Gold mining companies have fixed production costs, so any increase in the price of gold hits the bottom line, and profits are equally adversely affected by any drop in the price of gold. A rising gold price is a harbinger of inflationary pressures and therefore both gold and gold mining company stocks tend to rise when stocks are under pressure overall and fall when the stock market is generally up during the day. .
A pure form of gold (and indeed precious metals) investment/trading play and one that is not well known to many US-based investors is the Central Fund of Canada, which is quoted on the Toronto Stock Exchange and US stocks The symbol on the exchange is with CEF. , The Calgary, Alberta-based Central Fund of Canada is not itself engaged in any kind of mining operations. It is a closed-end investment management company established in 1961 to passively hold gold and silver bullion on a safe-haven basis. At least 90% of CEF’s assets are held in gold and silver. An investment in the Central Fund of Canada provides share ownership in this gold and silver bullion, which, together with some cash holdings and other assets, was valued at less than $950 million (US dollars) as of August 31, 2007. The split in precious metals holdings at that time was 52% of net assets in gold and 46% of net assets in silver.
It should be noted that silver has somewhat higher volatility than gold, largely due to the fact that it has fewer commercial and industrial applications, as well as not having the same status as an “ultimate store of value”. So for trading positions, the silver element serves to “juice up” the position. For an investor, on the other hand, the Central Fund of Canada can still be targeted specifically in gold as well as a way to take a speculative position in precious metals. This is because the correlation between the price of gold and silver has a tendency to remain in a fixed pattern over time. More recently it has been around 60:1, with the value of one ounce of gold usually being equal to about sixty ounces of silver.
Recent developments with the introduction of Gold Exchange Traded Funds (ETFs) provide investors and traders with another convenient medium to speculate on or hedge the price of gold. These offer many of the basic advantages offered by the Central Fund of Canada in terms of convenience and easy availability. The key difference between the central fund model and ETFs is that, as open-ended vehicles, ETFs will trade closer to their underlying net asset value.
As with other closed-end vehicles, the Central Fund of Canada will generally trade at a discount or premium to its net asset value, which can at times be significant. (It currently trades at a premium). What the authors particularly like about CEF is its track record – 46 years in existence. We believe that narrow sector ETFs still have very little of a track record for all their advantages and disadvantages as trading and investment vehicles have fully emerged and we do not yet have the same comfort level as ETFs that CEF provides us. At the very least, as an older and more mature cousin of today’s hot gold sector ETFs, we would suggest that the latter may interest investors/traders in watching central funds more closely. Canadian.
Full disclosure: The author trades in and out of stocks on a very short term basis using his own “Contrarian Ripple Trading” technique. Of the stocks mentioned here, he has traded recently in the CEF, ABX and NEM.
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