A Guide to Crafting an Investment Strategy for the Gold Market
Over the years to come, the gold market will continue to play a growing role as a cornerstone of investment strategy for individuals and organizations as well as governments around the globe. Yet, it seems safe to say that not everyone will benefit to the same degree from the ascent of the golden metal. This article is addressed to the investor who intends to be part of the leading edge in the marketplace. In particular, the objective is to set the stage for an orderly foray into the field. The roundup of guidelines is accompanied by a medley of references to additional resources on the Web.
Contents
1. Varied Behavior of the Gold Market over Distinct Time Frames
2. Patterns of Demand over Different Stretches of Time
3. Wellsprings of Supply over Disparate Time Frames
A Cautionary Tale
Crux of the Story
4. Combining the Findings with Historical Parallels
A Selection of Tips
A Smattering of Caveats
Moving Forward
Resources on the Web
At the dawn of the millennium, the gold market plays an expanding role as a centerpiece of investment strategy in the private sector as well as the public domain. If history is any guide, though, not everyone will benefit to the same degree from the tidal wave in the marketplace.
In line with the usual course of events, the majority of investors will come late to the party. Myriads of players will dash into the arena as the ferment in the gold market turns into a frenzy, then morphs into an outright bubble. The mania is sure to be followed by a blowout that wipes out the airy profits of the latecomers as well as the bulk of the funds committed in haste.
That is the standard outcome for any asset bubble. The debacles of the recent past include the Internet craze around the turn of the millennium. The crackup was followed shortly by a housing bubble that lasted half a decade before it duly popped; the upshot was the worst financial crisis since the Great Depression of the 1930s.
On a positive note, though, a cohort of savvy investors is maneuvering in a timely fashion to take advantage of the groundswell that is still in its prime. The spearheads will also make plans in advance to quit the upsurge well before the hubbub builds to a climax followed by a blowout.
Given the complexity of the gold market, no single article or tome will do full justice to the subject. Rather, the best that can be done in an introductory briefing is to lay the foundation for further investigation.
To this end, the body of this article presents a coherent approach to tackling the market for gold. In addition to a clutch of guidelines, the lineup of references serves as a launching pad for further sources of information.
In line with the usual course of events, the majority of investors will come late to the party. Myriads of players will dash into the arena as the ferment in the gold market turns into a frenzy, then morphs into an outright bubble. The mania is sure to be followed by a blowout that wipes out the airy profits of the latecomers as well as the bulk of the funds committed in haste.
That is the standard outcome for any asset bubble. The debacles of the recent past include the Internet craze around the turn of the millennium. The crackup was followed shortly by a housing bubble that lasted half a decade before it duly popped; the upshot was the worst financial crisis since the Great Depression of the 1930s.
On a positive note, though, a cohort of savvy investors is maneuvering in a timely fashion to take advantage of the groundswell that is still in its prime. The spearheads will also make plans in advance to quit the upsurge well before the hubbub builds to a climax followed by a blowout.
Given the complexity of the gold market, no single article or tome will do full justice to the subject. Rather, the best that can be done in an introductory briefing is to lay the foundation for further investigation.
To this end, the body of this article presents a coherent approach to tackling the market for gold. In addition to a clutch of guidelines, the lineup of references serves as a launching pad for further sources of information.
1. Varied Behavior of the Gold Market over Distinct Time Frames
As with any other asset, the price of gold fluctuates over time. On one hand, the movement of the market is often unpredictable. An example of this sort is a sudden spike in price sparked by the outbreak of a major war. Another instance is the disruption of supply due to the collapse of a large mine.
On the other hand, certain behaviors crop up with a modicum of reliability. A case in point is the role of gold as a keystone of the panoply of natural resources.
As a group, raw materials have a tendency to surge and slump several times over the course of a single century. In line with the grand cycle of the commodity complex, the winter of the 20th century witnessed a moribund market for natural resources.
Since the turn of the millennium, though, raw materials have begun to stir back to life. On current trends, the upswing will last until the second half of the 2010s.
Digging deeper into the subject, we find that the market for natural resources does not follow a single cycle. Rather, there is an overlapping series of loops within loops.
An example in this vein is the undulation of prices over the course of the year. A showcase of this sort is the cycle of the harvest - as in the case of wheat and oranges - in tune with the seasons of the year. Another sample is the pattern of energy use resulting in the swings in price for crude oil, natural gas, and the like.
For its part, gold has a way of moving in tune with the calendar as well. As an example, the metal tends to perk up during the final stretch of the year. One reason for the pickup is the increase in demand for gold by wholesalers that fashion the metal into nuggets of jewelry. The trinkets are then sold to eager consumers in order to adorn brides in India, give as gifts for Christmas, and so on.
Given this backdrop, it's helpful to keep track of cycles of varying scope. There are of course factors that lie beyond the reach of the regular loops in price.
An example of this breed is the penchant of central banks around the globe for printing up mounds of money in an effort to grease the wheels of commerce each time the economy falters. The upshot is an upward drift of the general level of prices. The bloat of prices in turn prompts investors to increase their holdings of gold as a safeguard against inflation.
In these ways, a potpourri of forces plays out its role in the gold market. The nature and scope of the consequences depends on a variety of factors including the length of the planning horizon. Certain factors make their presence felt over the near term while others play out their roles over the long haul.
2. Patterns of Demand over Different Stretches of Time
In line with the foregoing remarks, different factors come to the fore depending on the size of the window for investment planning. An example of a secular trend is the growing cohort of newfound consumers that are joining the global economy by the billions.
The fresh crop of entrants into the marketplace demands goods of all kinds including gold. In their role as consumers, the newcomers clamor for worked gold in the form of ornamentation. The metal also has a number of practical uses, as in the case of fillings for dental cavities.
In addition, the upgrowth of wealth leads to an upsurge in demand for gold as a store of value. As investors, the denizens of emerging nations as well as developed countries hanker after the golden metal in the form of coin and bullion.
The impact of each driver on the price of gold will vary over time. For this reason, the investor has to pick out the most salient factors depending on the length of the planning window.
3. Wellsprings of Supply over Disparate Time Frames
The constraints on supply over the short run play a major role in the supercycle of raw materials. An obvious example is the long lead time required to bring a new strategies source of production on stream.
In the case of a gold mine, for instance, the preparatory stage could require years of effort: planning the project, obtaining the permits, building the facility, and training the workers. All too often, the process of finding a suitable deposit and bringing the resource to production takes the better part of a decade.
As a case in point, procuring the raft of permits could by itself take more than half a decade - assuming that the licensing can be arranged at all. In the modern era, the main stumbling block is the gauntlet of roadblocks thrown up by conservation groups.
The fanatics within the ensemble have a penchant for stirring up frivolous lawsuits against not only the mining company, but the government agencies that issue the permits. Such is the power of the environmental lobby that a single crank can stop a venture dead in tracks even when there is no sensible basis for the obstruction.
In the case of a gold mine, for instance, the preparatory stage could require years of effort: planning the project, obtaining the permits, building the facility, and training the workers. All too often, the process of finding a suitable deposit and bringing the resource to production takes the better part of a decade.
As a case in point, procuring the raft of permits could by itself take more than half a decade - assuming that the licensing can be arranged at all. In the modern era, the main stumbling block is the gauntlet of roadblocks thrown up by conservation groups.
The fanatics within the ensemble have a penchant for stirring up frivolous lawsuits against not only the mining company, but the government agencies that issue the permits. Such is the power of the environmental lobby that a single crank can stop a venture dead in tracks even when there is no sensible basis for the obstruction.
A Cautionary Tale
A case in point is a mining venture in Romania at the dawn of the millennium. A Western company had been preparing to take over the operation of a mine at a site called Rosia Montana. Although the lode had been mined since Roman times, the rich veins had long since been depleted.
By using outmoded methods of production, the state-owned company was churning out a river of heavy metals and other noxious wastes. A disregard of the natural environment and a contempt for human welfare were of course standard operating procedures during the dark days of the Communist era.
To make matters worse, the local enterprise had been losing money. Even so, the Romanian government subsidized the operation in order to preserve the main source of livelihood in the impoverished district.
On the other hand, the handouts from the public treasury violated the code of competitive practices enforced by the European Union. For this reason, along with the archaic modes of production, the mine had to be shut down in 2006, just before Romania joined the Union.
Given the meager scale of the mining operations, the population of Rosia Montana had in fact been declining since the 19th century. By the dawn of the 21st century, the community had dwindled to roughly 3,000 residents.
The principal behind the brand-new strategies venture was a Canadian firm named Gabriel Resources. In spite of its small size, the competence of the firm was reflected in the partial ownership of equity by Newmont Mining Corporation, a stalwart of the mining industry.
According to Gabriel Resources, the joint project with the Romanian government would generate approximately US$4 billion for the national economy. Of this amount, $1.8 billion would go directly to the government as a result of its stake of about 20% in the equity of the joint venture. Meanwhile, another $2.2 billion would flow into the Romanian economy due to the purchase of a panoply of goods and services by the Canadian firm.
Another boon for the economy was the creation of jobs in an area of high unemployment. The foreign partner estimated that the project would bring approximately 2,340 direct jobs during the construction phase lasting two years, plus more than 880 direct jobs over the span of 16 years during which the lode would be mined. Moreover, the need for attendant services would lead to the creation of another 4,500 jobs in Romania, most of which would crop up in the local district.
Once the operating plans were disclosed, most of the activists who opposed the project at first – both within and without the country – changed their minds and gave their blessing for the project to proceed. On the other hand, a couple of die-hards refused to see the light.
A case in point was a nonprofit group named Alburnus Maior. Although the outfit was supposedly based in Rosia Montana, the ringleaders behind the facade were in fact a bunch of foreign environmentalists.
The aliens threw up a series of roadblocks against the joint venture. The instrument of choice was a blitz of lawsuits claiming that some detail or other of the mining operation would violate certain regulations espoused by the European Union.
The barrage of lawsuits, whether frivolous or not, succeeding in clogging the works for the mining venture. As a result, Gabriel Resources ended up taking at least one step back for every two steps forward.
The Canadian firm had first received its permit to operate the mine in 1999. However, the company was notified later that a number of legal complications had to be resolved before the project could proceed.
Over the decade to follow, the firm invested over $400 million for feasibility studies and other preparatory steps required to carry the project forward. Yet, by 2009, the company was still tied up in legal battles without any definite prospects of a final clearance to operate the mine.
The joint venture with the Romanian government had the backing of most of the people in the district as well as external observers. The mine would create jobs for the locality and boost income for the nation.
In addition, Gabriel Resources intended to clean up the pools of toxic substances including arsenic and cyanide. The lethal chemicals had been spewed out across two millennia of uncontrolled mining operations.
Crux of the Story
Our concern here, however, is not the injustice of a legal system that permits alien environmentalists to hijack the international code of law for their own myopic purposes; to impose the values of outsiders with no real stake in the welfare of the nation in question; to condemn people to live out their lives in the midst of toxic wastes that injure human beings as well as ravage the entire ecosystem; to suppress the development of a nation without providing any compensation in return; to consign the local population to poverty by preventing them from accessing their own natural resources.
Rather, our task here is much simpler. The key point is that permits and other stumpers play a humongous role in the process of bringing a mine to the production stage. For this reason, a decade has to pass before an upswell in the price of raw materials can result in a sizable expansion of the supply of commodities in the marketplace.
For this reason, the surprise lies not in the lengthy period of the commodity cycle for which the upswing lasts on the order of 17 years or so. Rather, the remarkable aspect of the forum is the following: after all the time and effort required to set up a brand-new strategies facility or restart an old mine, the operators often have less than a decade to enjoy the run-up in prices.
When the gush of newfound production comes on stream in full force, the price cycle quickly reaches a zenith. Shortly thereafter, the price begins to falter then slide down a slippery slope. At this juncture, the long winter of the commodity market begins anew.
4. Combining the Findings with Historical Parallels
According to a quip pinned on Mark Twain, "History may not repeat itself, but it rhymes a lot." In line with this adage, the task of the planner is to figure out the patterns in the marketplace based on current trends and prior cases.
An example in this vein is the interplay of recurrent cycles and unique events. The interaction is spotlighted by the fusion of the mid-run cycle of the commodity market in tandem with the secular trend of economic strategies development in emerging regions.
