Four reasons one investor thinks gold could jump this year - MarketWatch

Four reasons one investor thinks gold could jump this year - MarketWatch: "Chinese demand expected to grow
Finally, there’s China, a demand powerhouse for a vast range of commodities that is among the world’s biggest buyers of gold.

The country has already turned to a “price maker from a price taker” as it attempts to gain more control over the pricing of gold, Holmes said. September gold imports to Hong Kong rose to around 97 metric tons from 59 metric tons in August, Holmes said.

Read: China wants to steal gold-market ‘reins’ from New York, London

Interest rates in China have turned negative, and the summer saw increased uncertainty in the country’s equity markets. That, Holmes said, means there’s likely to be a pickup in Chinese gold buying. Global gold demand rose in the third quarter, according to the World Gold Council.

It is “really significant” that China’s real deposit rate — the rate banks pay for deposits — turned negative again, according to Holmes, who calculates that the nominal deposit rate of 1.5% minus the CPI number of 1.6% equals negative 0.1% for September.

The People’s Bank of China recently cut its benchmark lending and deposit rates by 0.25 percentage point, sending the lending rate to 4.35% and one-year deposit rate to 1.5%. “This will cause negative real rates in China to fall even lower, which is good for gold demand,” said Holmes.

For any country that does that, “it’s bullish for gold in that country’s currency, so odds favor that they’re only going to buy more gold,” he said. “That is big.”

Gold stocks have been ‘beaten up so badly’
Given that gold prices trade nearly 9% lower year to date, it’s no surprise that gold mutual funds are poised for negative returns this year, but some have done better than others.

As of the end of October, the U.S. Global Investors’s Gold and Precious Metals Fund USERX, +0.00% is down about 0.6% this year. The Tocqueville Gold Fund TGLDX, -0.91% is down about 19% year-to-date.

U.S. Global Investors’s fund invests in shares of companies mainly involved in mining and processing of gold and other precious metals, while the Tocqueville fund invests in gold and other precious metals, as well as gold mining or processing companies.

Holmes continues to see upside in gold investments. He likes Royal Gold Inc. RGLD, +0.06% Silver Wheaton Corp. SLW, -0.57% and Franco-Nevada Corp. FNV, -0.06% — all of which have high profit margins.

He suggests a 10% portfolio investment in gold bullion and mining stocks, rebalancing every year to maintain that percentage, and continues to see an upside for gold stocks. “They’ve been beaten up so badly,” said Holmes."



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