A September for Gold GOLD

A September for Gold GOLD<br /><br />If historys any judge, fall is a great time to be a gold bug. Global Investors, an investment adviser managing 13 natural resources and emerging market mutual funds. On average, he says, gold rises about 2.5% over its August price not too shabby. But will it be enough to break $1,000 for good?<br /><br />Mr.<br /><br />HAI associate editor Lara Crigger recently spoke with Mr. Holmes about gold investing, including what drives the September spike and the October correction, which miners hes got his eye on and why deflation is just as good for gold as inflation. Global Investors Holmes: There are several factors that contribute to good times for gold stocks and bullion. Basically, the stars are all aligned, especially for jewelry and financial.<br /><br />First of all, lets deal with the jewelry demand. Right now kicks off what I like to call the planets most potent gold demand drivers. The rainy season is over in Thailand, Vietnam, Bangladesh, India, and people have started going out from the village and buying gold. So you move into the post monsoon wedding season. Then you have Ramadan, the big Muslim holiday, and gold giving is very significant during Ramadan. Then, in November, is Diwali season its extremely festive, the Season of Lights. Theres a tremendous amount of gold gift giving, like for Christmas time. and Europe. After that, its the Chinese New Year, which peaks things out by February.<br /><br />The stronger September is, however, theres usually a big correction in October.<br /><br />Crigger: Why is that? Holmes: The dollar, which is the financial component in this equation. Going back over 20 years of data, looking at the correlation on weekly price movements, you see that there is a 70% inverse correlation between the direction of the dollar and the direction of gold. So September and December are two months of the year where the dollar is weaker, although last year was a bit of an anomaly. market is down. But whats interesting is that lately, weve seen the markets actually doing better when the dollar is weak. The market corrects including even gold when the dollar is strong. Why is that? Because a weaker dollar helps us export.<br /><br />So people say that a weak dollar is good for gold, so its bad for America. But now, its a weak dollar is good for America and its good for gold! Thats the shift were seeing.<br /><br />Crigger: Weve seen a lot of reduction in jewelry demand, especially in India. How will that impact prices? Holmes: In our recent research, in India theres a lot of concern about the economic slowdown, and theyre starting to save more. Jewelry demand was off 31%. But the positive part is that the rupee has fallen so much, so, in rupee terms, gold has gone to an all time high. In rupee terms, youve not lost any money in gold in the past year, although in the stock market, you have.<br /><br />One of the largest gold jewelry stores in India has commented that theyre seeing pickup now, that people are feeling less threatened that theres less risk of a major depression, so theyre buying gold.<br /><br />The other factor is China. China is the No. 2 gold market in the world, but its also the No. 1 gold producing nation in the world. But any gold thats being produced in China, their central bank is buying it all, so that supply is not hitting the world. And in China, for a year over year basis, gold demand actually increased 6%.<br /><br />Crigger: Weve seen relatively flat investment demand for gold in the past quarter or two. Will that stay the same as we move into September? Holmes: It comes in waves. Its not straight up. What you saw, some of the hedge funds repositioned and bought stocks, as the stocks outperformed bullion this year. Last year bullion outperformed the stocks. So youre seeing this rotation.<br /><br />There have been many times when the ETF goes all out that gold has just gone sideways or even declines a bit. Several people who were in at such size wanted to take delivery to make sure the gold was there. They also wanted to be more discreet, so that nobody knew exactly how much gold they owned. And the cost of the insurance and everything else, it was just cheaper for them to buy it.<br /><br />Crigger: So will the historical September uptick be enough to help us break the $1,000/oz barrier? Holmes: Well, you have to remember that the dollar is substantially higher than it was 18 months ago. If the dollar goes back to June of 2008, then youll probably see gold at $1,200.<br /><br />Theres one more thing that I think is very important: Since 2001, our thesis has been that this is a deflationary gold cycle, not an inflationary gold cycle. So gold has gone from $250 to $1,000 on deflation, not inflation.<br /><br />Crigger: Thats different than what many people are saying. Why do you think so?Holmes: History has shown that whenever the government pays you less interest than the inflationary rate, theyre worried about deflation. Theyre trying to stimulate the country. So for the past eight years, 80% of the time weve been dealing with negative interest rates. Thats a key factor.<br /><br />Historically, when the gold has been weak and the dollars been strong, thats when the government pays you 3% over the inflationary rate. So if inflation is running at 1%, then they should be paying you 4% on a Treasury. But theyre not. Youre earning less than the inflationary rate. Therefore you should be owning some gold.<br /><br />The other factor is when you have deficit spending and negative interest rates, which we have right now. When President Clinton was in power, we had the opposite: We had a surplus and we had positive interest rates. And guess where gold was? It was a dog. It was terrible.<br /><br />Now this is all reversed, and theres no big runaway inflation. Thats where you still have financial instability. Governments are going to print money like weve never seen before, theyre going to keep interest rates low, so they can stimulate this economy and get things back on track if they can. And theyre going to devalue the currency with that.<br /><br />So you can devalue a currency with big deflation or big inflation. Anytime you get either, its instability into the currency, and gold does well. And thats what were living with right now. We have the deficit spending $10 trillion and growing and its going to be around for many, many years. So I think were going to see gold trade higher.<br /><br />Crigger: A few months ago, you wrote that the time was right to purchase gold mining stocks. Why is that, and do you still feel that way?<br /><br />Holmes: Theres a high correlation between confidence in gold stocks and the financial index. If the banks are healthier, then you start to see money going into small caps and mid caps, in all asset classes. It has a significant impact in confidence in gold stocks.<br /><br />Crigger: Do you think that mining stocks will continue to do well from here on out?Holmes: Well, theyve had a heck of a move on a relative basis. Like today 9/2/09, gold was up about 1.72%, and gold stocks were up 6%. So it still offers tremendous leverage to the upside. One just has to be selective.<br /><br />We tell people that they should focus on those companies a that are unhedged, and b where the management cares about value per share, not value destruction by acquiring everything and anything, destroying the production per share and reserve per share metrics.<br /><br />Crigger: Any of those companies that you specifically like?Holmes: My favorite is Randgold Nasdaq: GOLD. Randgold CEO Dr. Mark Bristow has done a wonderful job protecting that. He recently acquired Moto Goldmines TSX: MGL, and hes into financing, so hes got a war chest now thats even bigger. So that I think is a stock thats going to have a rising production profile. In a rising gold scenario, thats good.<br /><br />Two would be a company farther down the food chain, the mid cap Jaguar Mining NYSE: JAG. Theyre producing in Brazil. Thats a stock I like for the speculators, for the wild flyers. Mindoro is doing a reverse takeover of Colombian gold fields, which have a lot of debt problems. In July, I went down and visited, and I was just amazed at their vision to consolidate this whole mountain and then start production. The Colombia gold fields merging under Mindoro have the potential to be 10, 11 million ounces. They have to do a lot still, but if you run the math through it, the stock could quadruple from here.