How investors can cash in on gold's bull market ​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​​

Peter Cooper analyses why the precious metal's price suddenly took off and says silver could be next

Photo Taken In United Arab Emirates, Dubai
Powered by automated translation

It’s been an exciting six weeks for gold investors. The gold price is up $140 or 11 per cent and has decisively broken out of the doldrums of its trading range of six long years.

Of course, there will be pullbacks - we saw two quick ones last week. Gold will not go up in a straight line. But a new bull market for the yellow metal has been born and that opens up a whole new era of opportunities for investors that did not previously exist.

Only two months ago, $1,500 (Dh5,509) per ounce for gold looked a mirage, now it could happen in a few days of hectic trading after an aggressive tweet in the middle of the night from Mr Trump.

Years ago, a very successful Dubai investor told me if you could not sum up an investment theory in a simple sentence then forget it. You have to get the fundamentals right, he said, and the rest is just a question of making the best of a great opportunity.

This is exactly what is happening with gold. After a very long delay, the gold train is finally leaving the station, and the important thing is to jump on board for the ride.

First we need to understand why the gold price suddenly took off?

Partly, this is just cyclical. We are at the point in the investment cycle where people seek out safe haven assets as protection against an obvious downturn set to come in major global stock markets, especially with trade wars and tariffs now hitting profit margins.

Security scares in parts of the Arabian Gulf have also played a part in raising gold prices, so too has the Brexit disruption in Europe.

But it is also a reaction to falling global interest rates, and the political pressure for more rate cuts. Gold does not pay an interest rate but it does not charge you negative interest rates like some banks these days.

Only last week Donald Trump made two appointments to the Federal Reserve who were both dovish on interest rates. Plus, International Monetary Fund managing director Christine Lagarde was nominated as the new president of the European Central Bank, another notably dovish move.

Finally, gold was frankly cheap by comparison to the inflation of other major asset classes by low interest rates and it was overdue for a price rise.

So how should you invest? Only two months ago, $1,500 (Dh5,509) per ounce for gold looked a mirage, now it could happen in a few days of hectic trading after an aggressive tweet in the middle of the night from Mr Trump.

The first buying option is the precious metal itself You can buy this in a gold souk for a small margin, or buy an exchange traded fund like GLD to hold it in an internet brokerage account. It is heavy stuff with a security risk, so the internet account has its benefits.

However, you will find much better gains by acquiring shares in the companies that produce gold. If 11 per cent sounded impressive for the recent gold price increase, consider that shares in GDX, an ETF basket of large gold companies, were up 28 per cent.

The last time gold prices raced ahead was in the first half of 2006. Then gold gained 30 per cent while the GDX was up 150 per cent. That’s because the profits of these companies grow much faster than the actual gold price as their operating costs are pretty fixed.

Personally, I prefer the GDXJ. This is an ETF of medium sized and some junior gold companies. According to gold analysts, these companies are also far better placed to raise their profits than many major firms that have serious labour issues and, in some cases, mines that are running out of gold.

Then again, please do not forget silver. The ratio of gold to silver is the highest it has been for decades at over 90, which means gold is valued at 90 times the price of silver. The long term average is 55; this screams that silver is astonishingly cheap.

While the price is going up alongside gold, silver is just moving more slowly. But it is moving and that is critical because it means silver’s chart breakout is definitely coming.

Think of this as pulling a brick on a piece of elastic. Nothing happens for a while until the brick suddenly takes off.

The silver market is tighter than gold, which means the entry of a mass of new buyers will quickly overwhelm supply and cause the price to shoot up.

Again, as with gold, there is the ETF SLV to add to your internet brokerage account. However, if you really want to score then lever up the silver price by buying the bombed out shares of the silver producers with ETFs like SIL, or SILJ for the maximum leverage with the smaller companies.

Peter Cooper has been writing about Gulf finance for two decades