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Investment: Go for gold, but get cautious on oil

“Dynamics have begun to change inexorably towards a diminishing supply of gold and increasing investment demand.”  So said David Davis, analyst at Credit Suisse Standard Securities.

It has also been said that we are very close to a point where the total of private investor holdings of gold bullion will exceed the total amount held by central banks. At fullCircle Asset Management we are wrestling with the big question. We expect there to be three stages to this primary bull market for gold. The first stage from 2001 ended in 2005 when the second stage started at an accelerated rate. The possibility is that in August last year the third stage commenced. If that is so, then it will all get very fast and furious and we would expect, as a minimum, for the gold price to double in a relatively short time.  If you look at the published chart from January 2003, you will see the latest accelerated trend for gold bullion. If it is at that third stage, then that trend should sustain and as time goes by, even accelerate. The end of the gold bull market will look like a stick standing in a jar.

It is impossible, at this stage, to know if the third stage has commenced, so we are vigilantly watching price action.  If the second stage is yet to finish, then in due course the gold price is going to come back at least to the uptrend from 2005, somewhere between $750 and $800/oz. We are very confident that the bull market is not over, the eventual new all-time high has not yet been made and more likely than not, when it is made, will be in the region of $2,000/oz. We would expect investments in gold mining shares to do better than investments in gold bullion by a ratio of about three to one; of late, that has not been the case, gold bullion has enjoyed the best of it. If gold bullion has entered the third stage of its bull market, there is a possibility that the metal may continue to out-perform.  We are, therefore, considering a change to the investment stance.  We may look to reduce exposure to gold mining shares and replace it with exposure to a gold ETF or possibly a gold structured note. Another dilemma we have is the likelihood of the bull market for industrial commodities upholding as the global economy slows. Common sense tells us this must have an impact upon base metal mining stocks.

Energy is possibly a horse of a different color but yet again, we are watching price action very carefully. The ongoing supply limitations are further affected by the fact that the oil producing nations are themselves economically growing. Their demand for oil is rising exponentially and limiting that amount of oil they have for export. And then there is China who we expect to continue to grow for political reasons if not for economic reasons irrespective of a global economic slump. Finally, there is the risk of political, terrorist or weather interference. As with industrial commodities, we hold these investments a little nervously and watch price action.  In particular, we may not wish to hold on if the oil price falls below $85 per barrel. (Moneyweek)

By John Robson & Andrew Selsby at fullCircle Asset Management, as published in the threesixty Newsletter, a fortnightly newsletter that gives insight into the investment markets.