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Gold-price correction is another buying opportunity for investors

by Wayne Cheveldayoff, 2006-06-15

Analysts are again talking about a buying opportunity for gold.

After suffering through a correction that may last well into the summer, which tends to be a seasonally weak period for gold, the gold price is expected to resume its climb on its way to its previous 1980s record high of $870 per ounce (U.S.) when the U.S. dollar resumes its downward trend.

Among others, investment dealer Merrill Lynch made a forecast of a higher gold price on June 9 when it upgraded Newmont Mining to a Buy recommendation.

The speculative wind was knocked out of the precious metal as the price fell from a recent peak of $736 per ounce in mid-May to around $600 per ounce just four weeks later.

It had run too far, too fast on heavy speculative buying -- soaring 68 per cent from $438 per ounce in July 2005.

The subsequent shaking out of the last-to-jump-in speculators brought the gold price back to its upward trend line. The gold price gained 19.4 per cent in 2003, 5.5 per cent in 2004, 17.9 per cent in 2005, and recently at $612 per ounce was up 18.5 per cent year to date.

Part of the recent price weakness stems from an apparent shift at the U.S. Federal Reserve to being more concerned with inflation. Instead of pausing, the U.S. central bank now appears likely to continue raising rates. This has stalled the depreciation of the U.S. dollar.

As the markets speculate about another quarter-point increase from 5 per cent in the Fed Funds rate at the June 29 FOMC meeting and again at the August 8 meeting, the U.S. dollar is likely to continue to be stable or even trend higher.

But when it is clear the Federal Reserve has stopped raising rates and the U.S. dollar slips again, the gold price will resume its upward trend.

With the U.S. housing market imploding and starting to dampen consumer spending, there is little doubt that the U.S. economy will be slowing down, perhaps severely. Thus, at some point, it won’t make sense for the Federal Reserve to keep raising interest rates.

Also, with economic prospects dimming, it won’t make sense for foreign investors to keep allocating capital to U.S. assets – something that has been very supportive of the U.S. dollar in the past year when the U.S. has run a huge $800-billion current account trade deficit. If interest rates won’t be going up, then the U.S. dollar will have to go down to make U.S. assets cheaper and more attractive to foreigner investors. One way or the other, the U.S. needs to attract foreign capital to pay for its excess consumption.

The upcoming weeks when the Federal Reserve will be in the spotlight coincides with a period of seasonal weakness for gold.

“History is repeating itself. The weakest months of the year for gold stocks are June and July,” reports Don Vialoux, a market strategist who publishes a daily market commentary at

He notes that the Philadelphia Gold and Precious Metals Index (Symbol XAU) has plunged an average of 4.5 per cent per period during the past 10 Junes and dropped an average of 3.4 per cent per period during the past 10 Julys.

But then, “Gold and gold stocks have a period of seasonal strength from the end of July to the end of September,” he says.

For investors, there are many ways to play the expected upswing in the gold price.

One could buy gold bullion or gold coins, mutual funds holding gold stocks, the Millennium Bullion Fund which holds gold, silver and platinum, a number of closed-end funds holding gold and silver, or the Streettracks Gold Trust (Symbol GLD), which is an exchange traded fund (ETF) holding only gold bullion.

There are also ETFs holding gold stocks. In Canada, the iShares CDN Gold Sector Index Fund (Symbol XGD) invests in 10 large Canadian gold miners traded on the Toronto Stock Exchange.

In the United States, the Market Vectors Gold Miners ETF (Symbol GDX) mimics the performance of the Amex Gold Miners Index (Symbol GDM), which consists of 43 gold and silver companies. It includes the big North American and South African producers as well as a number of junior exploration companies.

Wayne Cheveldayoff is a former investment advisor and professional financial planner. He is currently specializing in financial communications and investor relations at Wertheim + Co. in Toronto. His columns are archived at and he can be contacted at

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©2006 Wayne Cheveldayoff