Get ready for gold bullion's season of strength

Special to The Globe and Mail

(Photos.com)

The period of seasonal strength for gold bullion is approaching.

Thackray’s 2012 Investor’s Guide notes that the optimal time to invest in gold bullion for a seasonal trade is from July 12 to Oct. 9. The trade has been profitable during 11 of the past 14 periods. During the past 25 periods, gold bullion has outperformed the S&P 500 Index by 4.7 per cent per period

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Traditionally, advances in gold during its period of seasonal strength is attributed to precious metal fabricators in India who purchase bullion to make into jewellery for the Indian wedding season that starts in late October. India is the second-biggest consumer of gold jewellery in the world behind China.

However, demand for gold jewellery in India is expected to be lower than usual this year because the price of gold in Indian rupees has moved sharply higher. Indian rupees recently fell to an all-time low relative to the U.S. dollar. The cost of gold jewellery in India has skyrocketed with the price of gold.

Despite reduced demand for gold in India, prospects for the seasonal trade this year are higher than average. Demand for gold is increasing. Chinese consumer purchases of jewellery continue to increase.

Of greater importance, central banks including Russia, China and India are rumoured to be significant buyers. China continues to take action to diversify its reserves outside of U.S. dollar investments by adding to its gold holdings. China and India are rumoured to be buyers of gold for use in a gold-for-oil arrangement with Iran.

On the supply side, production from China, the world’s largest gold producer, is believed to be declining as older mines reduce production. Meanwhile, investor demand is increasing due to concerns that central banks are trying to stimulate their economies by essentially printing more money.

The United Kingdom and Europe and China announced additional monetary stimulus last week and a third quantitative easing program by the Federal Reserve during this summer is widely anticipated. More money chasing a relatively stable amount of gold will lead to higher gold prices.

On the charts, gold at $1,578.90 (U.S.) per ounce is showing early signs of recovery prior to its period of seasonal strength. An intermediate low was reached in mid-May at $1,526.70 per ounce. Gold recovered by early June to $1,642.40 and has formed a potential base building pattern.

Short term momentum indicators are trending higher. Strength relative to the S&P 500 Index and TSX Composite Index has been slightly positive since the beginning of April. A break above $1,642.40 implies intermediate upside potential to $1,766 where previous resistance is indicated.

Canadian investors can choose between six gold bullion Exchange Traded Funds (ETFs) that trade in Canadian dollars on the Toronto Exchange. Selection depends upon the investor’s investment objectives.

The most active ETF that directly tracks gold bullion is iShares Gold Bullion Fund (CGL-T). The ETF is backed by physical gold bullion. Units are hedged against U.S. dollar risk. Management Expense Ratio is 0.50 per cent.

iShares Canada also offers iShares COMEX Gold Trust units (IGT-T). The Canadian fund holds iShares Comex Gold Trust units (IAU) that trade on U.S. exchanges. Units are backed by physical gold bullion. Management Expense Ratio is 0.40 per cent. Because units are not hedged against changes in the value of the Canadian Dollar relative to the U.S. dollar, they track the price of gold in Canadian dollar terms.

Horizons offers four U.S. dollar hedged Exchange Traded Funds based on gold futures contracts. The basic product is the Horizons BetaPro COMEX Gold ETF (HUG-T), an unleveraged unit that tracks gold futures. Management Expense Ratio is 0.65 per cent.

The Horizons BetaPro Gold Bullion Bull + ETF (HBU-T) and the Horizons BetaPro Gold Bullion Bear + ETF (HBD-T) are leveraged products that track COMEX bullion futures contracts. The Bull ETF is designed to generate twice the daily upside performance of the futures contract. The Bear ETF is designed to generate twice the daily downside performance of the futures contract. Management Expense Ratio is 1.15 per cent.

Horizons also offers the Horizons Gold Yield Fund (HGY $8.92). The fund writes covered call options against one third of its gold bullion positions and distributes call option premiums as income on a monthly basis. Gold bullion positions are backed by gold bullion ETFs and gold bullion futures contracts. In addition, the fund offers partial participation in the trend of gold bullion. Management Expense Ratio is 0.60 per cent.

Preferred strategy is to accumulate gold bullion and its related ETFs at current or lower prices for a seasonal trade lasting until October.

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