How to maximise your gains in a gold rally

Peter Cooper tips the precious metal to move higher this week on the back of a weaker dollar and interest rate rises

Gold bars are presented at the German Central Bank in Frankfurt am Main, central Germany on August 23, 2017.
The Bundesbank, the German central bank, announced that it has completed the repatriation of all its gold reserves still stocked in Paris and part of those in the United States. / AFP PHOTO / dpa / Arne Dedert / Germany OUT
Powered by automated translation

The price of gold is likely to move higher again this week if the Federal Reserve raises interest rates as forecast.

Gold prices have jumped after each of the previous five rises of the current cycle and is more than 30 per cent up from its recent bear market low of $1,050, touched in December 2015.

Admittedly the price is barely up in 2018 so far. But it has not suffered anything like the volatility of US stock markets and its recent bull market trend is not broken.

If any single factor can be isolated to explain the latest price surge for the yellow metal, it has to be the relative weakness of the US dollar over this period. Will this continue?

Given that the US dollar was previously at a 14-year top, and that these trends tend to span a very long period, then history suggests that dollar weakness is not over yet.

The five Fed interest rate rises have so far failed to stop the fall in the greenback’s value as the market is more worried about a surge in the national debt courtesy of tax cuts and increased military spending.

One possible future scenario is that January's US stock market decline resumes and that the Fed then cuts interest rates to counter an even more serious correction.

That’s what happened in 2008 when rates rose up and up until the stock market crashed and then went down all the way to zero.

The effect of that was a dollar crash and soaring precious metal prices, with gold hitting an all-time high of $1,923 an ounce by October 2011.

Donald Trump favours a weaker dollar, higher inflation, trade tariffs and a rising national debt to fund tax cuts and a higher military budget. These are all gold price positive, and particularly bad for bonds that are the usual alternative safe haven asset to gold.

Any movement from the massive US bond pool into the much smaller gold market would have a huge impact on gold prices.

So, if you are convinced that gold has a bright future ahead, and the 2010 to 2011 gold bull market saw prices double, then how should you be positioning for maximum gain?


Read more from Peter Cooper:

Beware of the great cryptocurrency con

What Warren Buffett is really telling investors in his latest letter

Don't bank on cryptocurrencies as the hot tip for the year

Why every long-term expat should buy a property in the UAE


Probably the simplest approach is to diversify your holdings and buy some silver as well as gold. That’s because silver almost always outperforms gold in a bull market due to a much tighter supply and demand situation.

True it did not do so last year, but that may just leave a lot more upside for silver investors this year.

Gold is currently 80 times more expensive than silver, and on the four occasions this has happened in the past 30 years the price of silver has advanced significantly. Last time, in 2010 to 2011, gold doubled and silver more than trebled in price.

Indeed, the ratio of gold to silver has never stayed above 80 for more than two months before reversing and by extrapolation that predicts a surge in silver prices early next month, at the latest.

Silver can be bought in any Dubai gold souk in 500 gram or  kilogram bars; or you can buy the SLV exchange traded fund and conveniently keep it in your online brokerage account.

However, the most conventional way to gear up returns on a rising gold price, without going into debt, is to buy the shares of the large gold producers.

Rather like silver, equities in major gold producers have lagged far behind the price advances seen by the king of metals for the past 18 months.

That said there was a 150 per cent hike in the GDX gold miners exchange traded fund in the first half of 2016, a very good demonstration of how these shares can suddenly outperform a rising gold price.

And if you look back to the great 2000 to 2011 gold bull market, the metal itself saw a seven-fold increase in price, while the HUI index of major gold companies was up 16-fold.

I would argue that in current global stock markets, with very few bargains available, the patient investor ought to be looking at gold stocks. In fact, relative to the value of gold the big gold producers have seldom been more undervalued than today.

As goldbug Adam Hamilton of recently wrote: "This extreme anomaly can't and won't last… The first time gold hit $1,325 in October 2010, the HUI (index of major gold producers) was trading at 522. That is triple today's ludicrous levels!"

You can easily buy shares from the big producers like Barrick Gold, or the GDX, to put in your brokerage account.

For even bigger returns, consider the junior gold and silver companies. Their main assets generally comprise exploration prospects that will soar in value as precious metal prices increase.

Yet again, these guys have so far lagged a long way behind the recent recovery in the price of gold and silver.

They also tend to be highly volatile. For example, the ETF for junior silver companies, SILJ, is currently trading around 40 per cent down over that time frame.

Again if gold continues to rise in price then it should act like pulling a rubber band on a brick for these associated assets, with prices eventually flying back upwards.

But why are these junior companies so out-of-favour with investors at the moment?

My personal view is that all the speculative money has moved into Bitcoin and cryptocurrencies in the past nine months, with investors forgetting about speculative gold and silver companies.

They have also underperformed for such a long time that many investors gave up and found a temporary ‘gold mine’ in cryptocurrencies, until that market blew up in January.

Could punters soon rediscover gold and silver juniors as a 'new' speculation?

Open your eyes to a wealth of opportunities right now in the gold and silver sector, where you can still get in ahead of the crowd.

Peter Cooper has been writing about finance in the Gulf for more than 20 years