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Why Gold Bugs Are Bouncing


Seasonal, long-term prospects are bright, but now may not be time to buy.

September is a terrible time for stocks, but it's also a month when the yellow metal tends to shine.

On Wednesday, gold made an impressive move as the precious metal broke through $965, a key technical chart point. Minyanville checked in with market pros to get their two cents on gold, and where they see it headed from here. There's no doubt that there are both seasonal and long-term trends working in gold's favor, but some experts caution investors about chasing this kind of headline-making strength.

Frank Holmes, CEO and chief investment officer at US Global Investors, recently outlined the seasonal positives working for gold. Holmes notes that the gold price has risen in 16 of the 20 Septembers since 1989 -- by far the best success ratio of any month of the year.

Why? Holmes notes a few reasons, including the post-monsoon wedding season in India and Diwali, one of the country's most important festivals; restocking by jewelry makers in advance of the Christmas shopping season in the US; and this year, the holy month of Ramadan in the Muslim world ends in late September and is marked by a period of celebrating and gift-giving.

Holmes concedes that this could be a challenging September in India, which is the world's largest gold consumer. The economic slowdown there coupled with high gold prices caused jewelry demand to drop 31% in the second-quarter versus the year-ago period. However, at the same time, the World Gold Council says India's bank deposits enjoyed 22% year-over-year growth in the second quarter.

"So cash is available to be spent if the rupee price for gold weakens even slightly," says Holmes.

Also, the CIO says that one of the most consistent correlations for gold is its inverse relationship with the US dollar. When gold moves up, the dollar tends to be down. Over the last 20 years, this relationship occurs nearly 70% of the time. September is only second to December in terms of dollar weakness, and this year is looking like it won't be an exception. The greenback is down 13% since March.

As for specific stock picks, Holmes right now likes Randgold Resources Limited (GOLD), Jaguar Mining (JAG), and Royal Gold (RGLD).

More long term, there are plenty of reasons for investors to hoard gold. For instance, gold stocks tend to outperform the overall stock market when the federal government is engaged in deficit spending. This year's federal deficit is a projected record $1.6 trillion. The White House says the deficit will grow another $9 trillion over the next ten years, stoking inflation fears and keeping downward pressure on the greenback.
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No positions in stocks mentioned.
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