The information in boldface below was updated on November 9, 2008.
HEED THE TRADERS' COMMITMENTS FOR GOLD AND SILVER (November 9, 2008): The traders' commitments can be found at http://www.cftc.gov/ or http://www.softwarenorth.com/ . Commercials are those traders who are most closely connected with their particular industry. The most recent data shows gold commercials with their smallest net short position since the spring of 2005, while silver commercials the previous week had been their least net short since the early spring of 2003. Both of these were prime times to buy precious metals and especially the shares of their producers. This is strongly bullish for gold and silver over the next year.
(November 9, 2008) HUI, the Amex Index of Unhedged Gold Mining Shares, had completed a historic decline of more than 71% from its peak of 519.68 on March 17, 2008 to its bottom of 150.27 on October 24, 2008. GDX and ASA, two popular funds of gold mining shares, suffered from similar plunges. I have therefore been progressively buying shares of GDX and ASA into all pullbacks, since I believe they will likely reach new all-time peaks whenever gold regains $1000 per ounce in 2009 and investors once again become wildly excited about precious metals and their shares.
GOLD-MINING CORRECTIONS DURING THE PAST SEVERAL YEARS: HUI, the Amex Goldbugs Index of Unhedged Gold Mining Shares, has experienced six major corrections during the past 6-1/2 years. Here are the precise dates and figures for each pullback:
2002: 154.99 on June 4, 2002 to 92.82 on July 26, 2002: 40.1%.
2003: 154.92 on January 6, 2003 to 112.61 on March 13, 2003: 27.3%.
2003-2004: 258.60 on December 2, 2003 to 163.81 on May 10, 2004: 36.7%.
2004-2005: 248.18 on November 17, 2004 to 165.71 on May 16, 2005: 33.2%.
2006: 401.69 on May 11, 2006 to 270.54 on June 13, 2006: 32.65%.
2008: 519.68 on March 17, 2008 to 150.27 on October 24, 2008: 71.1%. Of course even deeper lows are possible later in 2008 or in early 2009, but I consider this to be unlikely. A bullish pattern of higher lows is the most likely scenario over the next several months, followed by a powerful surge to new all-time peaks whenever gold regains $1000 per ounce--probably in the spring or summer of 2009.
CONSIDER FUNDS FIRST: Many readers will be interested in purchasing funds of gold mining shares for some portion of their investment in precious metals, not wishing to assume the increased risk and volatility of owning shares of individual companies. There are several dozen such funds.
Since May 22, 2006, there has been a new exchange-traded fund of gold mining shares called GDX, which is intended to track the Amex-listed index GDM. More information on GDX can be found at http://www.vaneck.com/gdx. The management fee for GDX is currently only 0.55%. Since GDX has the lowest fee of all true gold funds, and can be traded intraday, it is currently my favorite gold fund. For Canadian investors, XGD on the Toronto Stock Exchange is a relatively close approximation for GDX, and also has a management fee of 0.55% (now that's collusion with a capital C!). More information on XGD can be found at http://www.ishares.ca/product_info/fund_holdings.do?ticker=XGD . However, XGD, while as equally diversified as GDX, generally trades with a greater bid-ask spread than GDX, thus making it comparatively somewhat more illiquid. Since the two funds will have an almost identical total performance when measured in any single currency, you should trade the one for which it is easiest for your broker to get the best fills.
Meanwhile, ASA is a closed-end fund of precious metals shares, including especially gold and platinum, which is more heavily weighted than most gold funds in South Africa. South African mining shares are currently heavily out of favor, which likely means that they will outperform other mining shares until more normal historic ratios are restored. Since the annualized management fee for ASA is currently 0.53%, which is slightly lower than the 0.55% fee for GDX or XGD, its similar ability to trade intraday makes it worth buying, especially whenever ASA's discount to net asset value exceeds 12%, which happens periodically. ASA is rather illiquid, so always trade it using limit orders rather than market orders. Check http://www.etfconnect.com/ or http://www.closed-endfunds.com/ for the latest information on net asset value, expenses, and portfolio holdings for ASA and other exchange-traded and closed-end funds. (November 9, 2008) I will likely be buying ASA over the next several weeks, as its discount to net asset value has been averaging well into double digits.
All but three of the open-end gold funds charge more than 1.2% percent of the total assets each year as a management fee, in some cases more than two percent annually. Some of these funds even charge upfront or redemption fees. If you feel that a particular fund manager has a track record which justifies such a high expense ratio, then you may wish to continue to invest in such a fund. However, it is possible that such a manager may not continue his winning streak, or his success may encourage him to leave for another company or to start his own hedge fund. The subsequent management will not necessarily be as competent, and may charge a significant fee for switching out of the fund. Caveat emptor.
The two open-end gold funds which charge the most reasonable fees are BGEIX, the American Century Global Gold Fund (current annual expense ratio 0.67%), and VGPMX, the Vanguard Precious Metals and Mining Fund (current ratio 0.28%, although it is currently closed to new investment). I have a strong preference for BGEIX over VGPMX, for the following reasons: 1) BGEIX charges a redemption fee of 1% only if the shares are held for less than 60 calendar days. VGPMX charges a 1% fee if the shares are held for less than a year. 2) BGEIX contains all pure gold mining companies. VGPMX contains several energy and base metal producers. If there is a fear of a recession, or similar economic developments, energy and base metal producers will likely underperform ordinary gold mining shares. Besides, I do not want diversification if I am purchasing a gold fund; I want gold mining shares, period. 3) BGEIX has always been open for new investment. VGPMX sometimes is closed for new investment, even if one has a considerable current holding in the fund. Note: VGPMX is currently closed to new investment, even if you currently own shares of the fund. I love Vanguard's funds in general, including their exchange-traded funds, but two big thumbs down to Vanguard for that! So stick with BGEIX if you prefer an open-end gold fund.
Appendix: I currently do not recommend FSAGX, the Fidelity Select Gold Fund, as it no longer permits hourly trading, but only end-of-day trading; thus, its higher expense ratio of 0.97% is no longer justified. As readers who have been tracking gold mining shares for many years already know, being able to buy and sell at 10 a.m. is worth a lot, since it is around this time of day that gold mining shares usually make their lows when they are forming an important bottom. Sometimes HUI will rise several percent between 10 a.m. and 4 p.m., as it did on May 10, 2004 (when HUI made its nadir of 163.81). Once it is appropriate to sell gold mining shares, it is also usually advantageous to do so at 10 a.m., when they generally peak during the formation of market tops.
GOLD AND REALITY: Gold and gold mining shares often correlate closely to the real rate of return for short-term U.S. time deposits. The lower the real rate of return, the better for gold and its shares, and vice versa. The real rate of return is equal to the nominal time deposit rate (roughly equal to the anticipated Federal funds rate) minus the inflation rate. (November 9, 2008) At the current time, core inflation is about 2.40% while the anticipated Federal funds rate is approximately 0.80%, yielding a real rate of return of negative 1.60%. Such a strong negative rate of return is strongly bullish for gold and silver, and especially for their shares. A special note to conspiracy fans who use an "underground" or "more realistic" rate of inflation: notice that this supposedly "better" rate follows exactly the same chart pattern as the official government rate. Therefore, the current spread had recently touched its highest point in more than six years, even if its absolute value differed from the numbers stated above. It should be noted that when gold experienced its lowest inflation-adjusted levels in 1999-2001, the inflation rate averaged 2.0% while the anticipated Federal funds rate was as high as 6.5%, yielding a real rate of return of as much as positive 4.5%. This positive 4.5% rate of return is the primary reason why gold fell all the way to $252 per troy ounce, not because of some ridiculous manipulation theory.
LOOKING FORWARD TO 2060: I'll make a very far forward prediction by stating that I believe U.S. equities will make a double bottom in 2010/2011 and 2018/2019, with the Nasdaq bottoming in 2010/2011, more than doubling sometime thereafter, and then making a final double-bottom retreat in 2018/2019, followed by a roaring bull market that will create a very long-term double top for the Nasdaq just above 5000 by perhaps 2037, followed by the next secular bear market. The all-time Nasdaq high of 5132.50 from March 2000 will probably not be seen again until around 2060, six decades after it had previously visited that mark, and obviously representing a much lower real level because of inflation. Jeremy Grantham, in the February 6, 2006 edition of Barron's, made a similar timewise prediction: U.S. equities will achieve their deepest nadir in 2010. His logic is that any asset class typically takes about one decade to go from top to bottom (U.S. equities peaked in March 2000). Residential real-estate lovers, take heed: the peak in 2005-2007 for housing prices worldwide implies that the bottom will most likely occur in 2015-2017.
LONG-TERM GOLD OUTLOOK: Gold will continue to make a pattern of higher lows as its strong bull market from a nadir of $254.00 per troy ounce on April 2, 2001 to the present continues throughout the next decade or so. Important higher lows included $319.10 on April 7, 2003; $371.25 in the morning of Monday, May 10, 2004; $410.75 on February 8, 2005; $428.00 on August 30, 2005; $534.00 on March 10, 2006; $542.50 on June 14, 2006; $563.25 on October 4, 2006; $602.00 on January 6, 2007; $641.50 on June 27, 2007; $651.75 on August 16, 2007; and $679.00 on October 24, 2008.
YOUR TYPICAL GARDEN-VARIETY SEVERE BEAR MARKET BOTTOM: (November 9, 2008) While U.S. equities will likely rally strongly over the next several months, they will continue to form a long-term pattern of lower highs in real terms until the dividend yield on the S&P 500, currently at a moderate 2.95% [source: Barron's], is between 6% and 9% roughly one decade from now when global equities reach multi-decade lows in inflation-adjusted terms. Great bull excesses are usually followed by equally severe recessions, which is finally becoming evident.