It's a basic economic principle that when all hell breaks loose in the world, investors rush to gold.
There's a basic reason for this flight to safe assets: When you buy gold, you own an irreplaceable, finite resource that has been humanity's universal medium of value for thousands of years.
?I see headlines every day touting gold as a necessary part of any portfolio. Many of those headlines suggest the recent global turmoil in Europe and the Middle East could have a big upside effect on gold prices.
But I am not here to tell you what everyone else is saying. I take pride in providing fundamental reasoning behind solid investment decisions — not just reactionary analysis. My goal is to recognize a trend as its beginning rather than reporting on the trend that you just missed.
With that in mind, I've identified a ripe opportunity in the gold market that looks very attractive.
Amid escalation of global conflict and growing economic uncertainty — gold is cheaper than it was three years ago.
But that could be changing. While the price of gold has fallen to just above $1,300 an ounce, we're heading into a seasonally strong demand period for gold.
This seasonal demand is driven by the retail stocking cycle as jewelry stores gear up for the holidays. But an even more significant driver is the Indian wedding season, where gold is a popular gift.
With India being the world's second-largest consumer of gold after China, any pickup in demand can greatly influence gold prices.
And the demand is there. In a recent statement, India's Commerce Ministry said the country imported $3.12 billion worth of gold in June — up more than 60% from June 2013.
Though import restrictions have been in place for the past two years, part of the reason for India's jump in gold imports is a recent easing of restrictive policies. Many experts think that policy will continue to ease as Indians continue to pay a premium for gold.
So although the buying pattern of gold is completely out of my hands, what is in my hands is an interesting gold investing trend I've found. Whether history repeats itself is up for debate. But if you've found a cyclical move that has proven itself time and time again… the risk/reward is pretty compelling.
I chose two time periods I believe benefit most from this seasonal buying pattern of gold. To show you, let's look at the performance of an exchange traded fund that tracks the price of gold, the SPDR Gold Shares (NYSE: GLD), for reference.
Over each of the past five years, if you had bought GLD on the first trading day in August and sold the first trading day of September, you would have averaged a 6.4% return on your invested capital (as you can see in the first row of the table below).
In the second row of the table, you can see that if you had bought gold on the first trading day in August, held it for four months, and sold it on the first trading day of December, your average historical return would be almost 10% over a four-month period.
?While we're a few trading days into the month, GLD is only up 1% — and the opportunity is still there to capture some potential upside.
Risks to Consider: Gold is a volatile commodity, and its price is influenced by a number of factors. Geopolitical events, increasing import/export taxes, and general market weakness could push gold down.
Action To Take –> If you'd like to approach this as a trade, to specifically take advantage of this seasonal pattern – a great way to do so is through the GLD ETF I mentioned. Because you can buy and sell it just like a stock, it's easier for the individual investor to buy shares of GLD than physical gold.
In terms of risk/reward, I don't see too much of a downside here. Even if the timetable doesn't play out exactly as planned — in the end you still get to buy shares of a physical gold ETF at one of its lowest prices in three years.
If these potential gains from gold have you excited, you’ll want to see the research my colleague Dave Forest has put together. Dave found a remote outpost that he believes could be the world's first $1 trillion boomtown. After taking a trip to the small town, he confirmed that both natural gas and mining investments in the area are set to skyrocket — with one gold miner already seeing a 1,500% gain. To get the names and ticker symbols of some of these boomtown companies, click here.