Gold a buy but must prove mettle

JUL 10, 2013
At around $1,200 an ounce, gold is starting to look like a buying opportunity. The precious metal now is down more than 36% from a September 2011 high of around $1,900 an ounce, but that slide was exacerbated as part of a marketwide sell-off in reaction to comments in June from Federal Reserve Chairman Ben S. Bernanke. Gold's dip below $1,200 on June 29 marked its lowest price since 2010, representing a “significant floor,” according to Uri Landesman, president of Platinum Partners LP. It closed at about $1,240 last Tuesday. “I think we're looking at the end of the slide for gold,” Mr. Landesman said. “I think the stock market keeps going down for the next four months but gold will act as a flight to quality as people flee from equities. So I think a great trade right now is long gold and short stocks.”

BREAK-EVEN LEVEL

One of the reasons investors such as Mr. Landesman see the price of gold as hitting a floor is because $1,200 an ounce is considered very close to a break-even level for mining and production companies. Similar to what occurred a year ago when the price of natural gas fell, production will stop when it no longer makes economic sense to the producers. “The challenge is determining the intrinsic value of an ounce of gold. I'm not sure we have that answer, but the price will rationalize supply, eventually,” said Mark Travis, manager of the $424 million Intrepid Capital Fund (ICMBX), which has a 3% allocation to gold and gold-related stocks. As a hard asset, gold is closely linked to the dollar and other currencies. Thus the statement from Mr. Bernanke that the five-year, $3.4 trillion quantitative-easing program will eventually end sent a lot of gold investors running for cover. But some argue that gold has had such a strong run over the past decade that it has attracted a lot of speculative money not known for riding through stretches of volatility. “Removing liquidity strengthens the dollar, and the markets don't like strong dollars, because it reduces the value of hard assets and equities,” explained Scott Carter, chief executive of Lear Capital, a precious-metals and commodities brokerage firm. “In my view, the debt financing that we've seen is going to have to continue for a long period of time.”

NO BOUNCE

While the equity markets have rebounded from the sell-off following Mr. Bernanke's remarks, gold has enjoyed no such bounce — despite attempts by multiple Fed presidents to calm investors' fears of sudden interest rate hikes. “Gold will have a longer tail, and over time, I think gold will have the same [recovery] reaction as equities did,” Mr. Carter said. Mr. Travis believes investors are getting ahead of themselves by selling gold and other hard assets as a reaction to any mention of tapering. “Gold is a natural diversifier, even if in the short run, it has been more like a de-worse-ifier,” he said. “Right now, gold is very much subjected to speculative flows, but as long as you've got a zero-interest-rate policy, you will have a floor for gold, and I'm not convinced there will be any quick change to the zero-interest-rate policy.”

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