Even with the price of gold down more than 40% over the past three years, there doesn't appear to be a big appetite for the precious metal, which is exactly why Keith Trauner is selecting adding exposure in his go-anywhere GoodHaven Fund (GOODX).
While Mr. Trauner isn't yet ready to add direct gold exposure through something like the SPDR Gold Shares ETF (GLD), he is hedging his inflation and currency risk by cautiously investing in gold mining stocks.
“What's fascinating is that gold is pretty much universally hated right now, but it's not hated in physical markets or in places like China and India,” he said. “The price of gold is basically where it was in 2008.”
Even with
a slight spike last Friday, gold prices have been trending downward for most of the year.
Mr. Trauner is anything but a gold bug, but he believes there is always a case for gold in a portfolio. He also admits to being somewhat perplexed by the current price trend of the precious metal.
“Gold prices are down from around $1,900 an ounce three years ago to just over $1,100 today, despite efforts by the global central banks to increase money supply,” he said. “That tells me that from an investment point of view, gold is tremendously out of favor, and if you're looking for value you're more likely to find it in areas that people are afraid of or disinterested in.”
The play, he said, is gold mining companies that have been beaten down between 25% and 50% over the past year, while the price of the metal has only been pushed down a few percentage points.
“Some of these equities represent inexpensive insurance policies against inflation or a decrease in the purchasing power of major currencies,” Mr. Trauner said. “A modest increase in price of commodity should result in an outsized increase in price of the shares of mining companies.”
Specifically, Mr. Trauner likes Barrick Gold Co. (ABX), but other big names in the category include GoldCorp Inc. (GG) and Newmont Mining Corp. (NEM).
Vern Sumnicht, chief executive and chief investment officer at iSectors, also isn't ready to bet against the idea of gold prices going lower, but does see an entry point coming soon.
“Historically, whenever gold has peaked, it tends to want to fall back to half of what it rose,” he said.
Theoretically, that means gold could fall another 14% from current levels to around $950 an ounce, Mr. Sumnicht concluded.
“I think the price will fall further because it's really hated, and that's a good thing for gold, eventually,” he added. “It was loved for so long that it has to go through a long period of being hated.”
The one thing that gold-watchers appear to be banking on is the ripple effects of higher interest rates, which should apply some downward pressure on the soaring U.S. dollar.
“That's when you'll see gold prices rising and gold getting interesting again,” Mr. Sumnicht said.
While he isn't there yet, Mr. Sumnicht confessed that if he were ready to buy gold, it would be through something like the Central Fund of Canada Ltd. (CEF), a closed-end fund that holds gold and silver, and is currently trading at a 7.5% discount to net asset value.
“I'm not ready for that yet,” he said. “My gut says to wait a little bit longer.”
Mr. Trauner concurred that the backdrop just doesn't add up to the price and direction of gold prices, which means that something has to eventually give.
“The central banks around the world are in dramatic expansion mode to try and promote inflation, the price of the metal is way down, and mining share prices have collapsed,” he said. “And, arguably, the instability in the world has probably increased over the past year.”
