An employee holds a gold ingot of 999 purity while working on medals for the 2014 Winter Olympic Games in Sochi, at the Adamas jewellery factory in Moscow, June 28, 2013. According to the factory, the production of all the series of medals for the 2014 Winter Olympic Games required not less than 3 kilograms of 999 purity gold.SERGEI KARPUKHIN/Reuters
The period of seasonal strength for gold bullion is approaching. Thackray's 2013 Investor's Guide notes that the optimal time to invest in gold bullion for a seasonal trade is from July 12 to October 9. The trade has been profitable during 12 of the past 15 periods.
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 this year in the first week in November. India is the second biggest consumer of gold jewellery in the world behind China. Demand for gold in India is higher than usual this year because investors are buying gold to protect against devaluation of the rupee. Recently, India imposed import tariffs on gold in order to slow imports of gold bullion.
Demand for gold is also increasing in other countries: Last year Chinese consumer purchases of jewellery exceeded Indian consumer purchases for the first time and continue to increase. Of greater importance central banks including Russia, China and India are rumoured to be significant buyers on recent price weakness.
On the supply side, lower prices have prompted gold producers to reduce production, shut down marginal mines and postpone development of new mines. More news about reduced production is expected to be released when gold producers announce at the end of July substantially lower second quarter earnings on a year-over-year basis.
On the charts, gold finally is showing signs of bottoming after a virtual collapse from a high of $1,798.10 (U.S.) per ounce last October. Last Friday, gold bounced from $1,179.40 (U.S.) where long term support exists. Short term momentum indicators are recovering from deeply oversold levels, typical at this time of year when gold has a tradition of forming a base pattern prior to its seasonal upside move. Additional technical evidence is needed before a seasonal trade is entered including establishment of an uptrend, outperformance relative to the S&P 500 Index and a move above its 20 day moving average.
Canadian investors can choose between six gold bullion Exchange Traded Funds 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. 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. The Canadian fund holds iShares Comex Gold Trust units 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, an unleveraged unit that tracks gold futures. Management Expense Ratio is 0.65 per cent.
The Horizons BetaPro Gold Bullion Bull + ETF and the Horizons BetaPro Gold Bullion Bear + ETF 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. 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.
The preferred strategy is to accumulate gold bullion and its related ETFs for a seasonal trade lasting until October when technical requirements for the trade are met.
Don Vialoux is the author of free daily reports on equity markets, sectors, commodities and Exchange Traded Funds. Daily reports are available at http://www.timingthemarket.ca/. He is also a research analyst for Horizons Investment Management Inc. All of the views expressed herein are his personal views although they may be reflected in positions or transactions in the various client portfolios managed by Horizons Investment Management.
Don Vialoux