Precious metal sector?

[Peter123]

Hey Henry,

What are your thoughts on the precious metal stock sector right now? Gold seems to have found a bottom. I was looking to by into the entire sector rather than an individual stock.

Thanks.

[normxxx]

You have great company. Ian McAvity also believes $500 will be a hard ceiling to pierce. Moreover, he is looking for a pullback to $375 first.

http://www.kitcocasey.com/displayArticle.php?id=162

On the other hand, a lot depends on the CBs. If they start to prefer Gold to dollars... who knows?
_________________
The content of this message is NOT to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.

[HenryTo]

Peter123,

The decoupling between the US$ and gold recently is a very interesting development - and one that I haven't been prepared for. That being said, commodities like oil and copper have also been going up despite a rising US$. I was a gold bug when the HUI was at 40, but I am not as much a gold bug anymore, even though I do have some coins for insurance purposes.

What spurred to do more intensive research on gold was during a Q&A session with Jim Rogers - when he first mentioned (a couple of years ago) that he wasn't that bullish on gold even though he believe the commodity markets will do very well over the next decade or so.

First, check out recently gold supply and demand data from the World Gold Council:

http://www.gold.org/value/stats/statistics/gold_demand/index.html

Next, you can find demand statistics from various geographic regions from 1996 to 2002:

http://www.gold.org/deliver.php?file=/value/markets/Gdt/Gdt42/GDT%2042%20stats.pdf (you need to register - which is free- before you can view this file)

So what can we infer from these statistics? Well, we know that 75% of all demand comes from jewelery consumption. We also know that there is no evidence of a shortage of supply - despite what other gurus would have you think. Next, demand from India far outstrips that of demand from the U.S. and Greater China.

From this article (http://www.mineweb.net/sections/whats_new/451851.htm), it looks like India's demand of gold totaled 647 tonnes - still 80 tonnes below India's demand in 2001 and 127 tonnes below peak demand in 1998. While income levels in India have definitely risen, it looks like demand for gold hasn't totally kept pace, given that gold prices have been rising quite a bit over recent years.

This is the same story in China: http://www.china.org.cn/english/BAT/106135.htm

Gold demand is currently only 200 tonnes - the same level as it was in 2002 and a full 173 tonnes lower than what it was back in 1997. Sure, demand is projected to rise to 600 tonnes over the "coming years" but that isn't obvious to me considering that gold demand has been declining even as a significant chunk of the Chinese population has gotten much more affluent over the last seven to eight years.

Part of the story is that the rise in gold prices have been cannabilzing demand, even as income levels in India and China rose at the same time as well. Another part of the story is that the "new affluent" is choosing to invest their money in other "stuff" besides gold - such as stocks, real estate, and new manufacturing plants and so forth. From a consumer standpoint, the "new affluent" in India and China would probably rather buy new cell phones, automobiles, LV handbangs, and go watch American movies, and so forth. Indeed, when one strolls through Hong Kong nowadays, the status symbols among the young are the cell phones, the shoes, and the handbangs, and not jewelery.

Of course, tastes and fashion will change - and demand for gold will continue to increase in the future, but it is very difficult to see how gold can rise much above $500 an ounce since any further rise above that in the gold price will most likely cannabilize future demand in the metal. Unless we have a currency crisis (such as the disintegration of the Euro), it is very difficult to see how gold can rise significantly higher here.

Best of Luck,

Henry

[Peter123]

I didn't mean to address it just to Henry; I appreciate the comments. Looks like Gold and the Precious Metals sector exploded (gapped up) to the upside today. Hopefully it has some upside yet.

[pcoulter]

Sorry, I'm not Henry, but I just thought that it's interesting to note that for the last few years, gold has traded inversely to the U.S. dollar. Now that the Dutch and French voted no on the EU constitution, the Euro isn't the greatest alternative to the dollar. It looks as though investors are flocking to gold as an alternative. Both gold and the U.S. dollar have been rallying recently - decoupling their inverse relationship.