‘Tis the Season For Gold

07/16/2008 12:00 am EST


Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert, says gold is entering its seasonally strongest period and he says one gold-mining stock is the best way to play its next move.

Seasonal strength for gold arrived early in 2008. Gold and gold-equity indices have a history of moving higher from the end of July until September.

During the past ten periods, gold has advanced in eight such occasions for an average gain of 6.8%. The gold stocks, as measured by the Philadelphia Gold & Silver Index, or XAU Index, have averaged a 9% gain during the same period.

Seasonal factors include major purchases usually occurring this time of the year. Fabrication demand typically spikes higher over the summer as jewelers prepare to purchase gold for Christmas and Diwali, the festival of light in India in late October. Gold jewelry accounts for roughly 70% of total demand produced annually.

Plus, investment demand from exchange traded funds remains very brisk as institutions and individuals alike continue to hedge their portfolios from inflation, the credit squeeze, and a weak dollar.

So, while total demand for gold has indeed remained strong, major producers continue to struggle. Australia, the world's third largest gold producer, reported that its gold production is expected to decline 7.8% this year to 231 tons-a sharper than expected decline. And in South Africa, major production bottlenecks continue to stifle gold and platinum production as power shortages continue throughout the country.

I think if you combine the above production problems with a still fragile global banking system, rising inflation, and the feeble American dollar, the result is a higher gold price.

Another bonus: Higher gold prices are lifting earnings and cash flows for the world's leading gold producers.

Gold equities are more attractive than gold or silver at these levels.

This doesn't mean you abandon gold, silver, and platinum exchange traded funds; what it implies is that the precious metals are expensive over the near term compared to their underlying mining stocks. The ratio between gold equity indexes and gold remains near the bottom of a six-year range and implies we will see a major advance by mining companies as gold takes out its March all-time high of $1,033 per ounce.

One of my favorite companies in the world is Goldcorp (NYSE: GG).

Every investor should own this company. I'm still forecasting a $75 target for Goldcorp before this bull market is over. But I'm beginning to think that maybe $100 might be more realistic. We're already at $48 and gold is south of $1,000 an ounce.

A wave of acquisitions has given Goldcorp 43% production growth between 2007 and 2012, which ranks as the best among the large-cap producers. Plus, GG has low cash costs per ounce and manages properties in friendly mining jurisdictions. If you're going to own just one gold stock, Goldcorp should be that ticket. In 2008, she's already up [around 40%].

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