Domestic and Indian Gold Rally Points to a Strong Second Half

By: Frank Holmes | Fri, Jul 18, 2014
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Earlier this week we reported that gold, defying expectations, is one of the best-performing commodities of the year so far.

Gold Jewelry

And now we've learned that gold bullion imports by India climbed a stunning 65 percent last month after the country's central bank allowed more investors to buy foreign bullion. Imports rose to $3.12 billion in June from $1.89 billion this time last year.

India is the world's second-largest consumer of gold after China, accounting for approximately 25 percent of all gold consumption. Gold is the country's second-largest import item after oil.

This news comes closely on the heels of the recent election of Prime Minister Narendra Modi, whose Bharatiya Janata Party (BJP) seeks to loosen import restrictions and other government regulations that tend to stifle economic growth. The rally also coincides with the Indian wedding season, which typically ends on July 7 and 8.

More importantly, what this news could portend is a stronger-than-normal second half of the year for the gold market. Data points going back 35 years confirm the probability of gold gaining strength in the second half, thanks largely to international celebrations such as Diwali, Ramadan and Christmas. This year in particular looks very promising indeed.


Keep your eyes on real interest rates

Recently I chatted with Daniela Cambone during my weekly Gold Game Film program on Kitco. I pointed out that, with the end of the Indian wedding season, we're historically due for a slight correction in the gold market. But whereas last year saw a huge contraction and liquidation of gold around this time, the gold bullion exchange-traded funds (ETFs) around the world this year actually expanded.

Daniela and I also looked ahead at the gold market in the coming months. One of the points I shared dealt with the strong correlation between gold performance and real interest rates, which you arrive at after subtracting inflation from the nominal interest rate.

If we go back to when gold was at $1,900 [in August 2011], the negative real interest rates were 200 basis points. Then by December of last year, it went to plus 50 basis points. Now it's gone negative again, and gold is rallying. And I think that that's a key factor when we look forward, and I think we're going to continue to have negative real interest rates. So when inflation starts to rise like it did in the '70s, [the Federal Reserve isn't] going to be able to lift rates as fast as the inflationary rate because it will stifle the economy dramatically.

Gold Rebound Linked to Fall in Interest Rates

One last point I want to emphasize is our perennial suggestion to investors: 5 percent exposure to gold bullion, 5 to gold stocks, and rebalance each year for an overall 10 percent weighting in your portfolio.

Last year the stock market boomed, whereas bullion disappointed and gold stocks dramatically underperformed. Had investors taken their profits in the stock market and rolled it into gold, they would have done exceptionally well this year.

That continues to be our discipline here at U.S. Global Investors, and the recent gold rally, domestically and in India, substantiates this position.

 


 

Frank Holmes

Author: Frank Holmes

Frank E. Holmes
Chief Executive Officer
Chief Investment Officer
U.S. Global Investors

Frank Holmes

Frank Holmes is CEO and chief investment officer of U.S. Global Investors, Inc., which manages a diversified family of mutual funds and hedge funds specializing in natural resources, emerging markets and infrastructure.

The company's funds have earned more than two dozen Lipper Fund Awards and certificates since 2000. The Global Resources Fund (PSPFX) was Lipper's top-performing global natural resources fund in 2010. In 2009, the World Precious Minerals Fund (UNWPX) was Lipper's top-performing gold fund, the second time in four years for that achievement. In addition, both funds received 2007 and 2008 Lipper Fund Awards as the best overall funds in their respective categories.

Mr. Holmes was 2006 mining fund manager of the year for Mining Journal, a leading publication for the global resources industry, and he is co-author of "The Goldwatcher: Demystifying Gold Investing."

He is also an advisor to the International Crisis Group, which works to resolve global conflict, and the William J. Clinton Foundation on sustainable development in nations with resource-based economies.

Mr. Holmes is a much-sought-after conference speaker and a regular commentator on financial television. He has been profiled by Fortune, Barron's, The Financial Times and other publications.


Please consider carefully a fund's investment objectives, risks, charges and expenses. For this and other important information, obtain a fund prospectus by visiting www.usfunds.com or by calling 1-800-US-FUNDS (1-800-873-8637). Read it carefully before investing. Distributed by U.S. Global Brokerage, Inc.

Copyright © 2010-2014 Frank Holmes

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