While there can be no doubt that the U.S. Federal Reserve wields immense power when it comes to the price of gold, it's important to remember that the commodity is global in nature. Gold has performed well over the past several weeks, in spite of increasing chances that the Fed will begin tapering in September. The result, according to at least one mining CEO, is that now is a great time to make investments in mining companies. Certainly with demand in both China and India remaining strong, there are global forces that should be bullish for gold and that have the potential to keep prices moving higher.
The Fed action
In a recent interview, EverBank's Chuck Butler reminds investors that tapering doesn't mean the end of quantitative easing, and that in that distinction lies the critical message. He believes that Ben Bernanke will choose to set the tapering plan in motion before his last meeting as Fed chair in December -- thus making the September meeting the time that the Fed will act. But as long as the Fed drops the level of bond buying by a manageable number -- he suggests $20 billion per month -- he doesn't see a meltdown in precious metals.
Time for consolidation
In a separate interview, CEO Rob McEwen of McEwen Mining (NYSE:MUX) points out that the lull in the gold market "has sold the good and the bad off equally." That means, he says, that smaller companies like McEwen can combine to create not just bigger companies, but more profitable ones. McEwen will be looking to make strategic acquisitions and put itself at the forefront of the recovery. That should make the stock, which is up nearly 31% in the past month, a name to watch as it looks to continue its recovery -- still down nearly 30% on a year-to-date basis.
The global nature of gold makes it a buy
The World Gold Council, as reported by Reuters ,recently expressed its belief that both China and India could see record demand levels, each surpassing 1,000 tonnes for 2013. This increased demand is one of the most significant reasons gold has remained strong in spite of strength in the U.S. dollar, and other factors that are typically bearish for gold. As we head into the rest of the year, there are concrete reasons to believe that global demand will be sufficient to drive prices higher.
What this means to you is not only that gold investments, like McEwen, look attractive here -- even with the recent gains -- but also that it should be a catalyst to reconsider how you think about gold investments overall. It would be easy to look at the activities taking place in the U.S. and conclude that the run in gold prices will shortly run out of steam, making gold increasingly risky. While there is some merit in this observation -- the U.S. is a significant factor -- recent price action reminds us that this is only a part of the story.
If the global picture continues to improve, investments in the commodity itself will remain attractive. The SPDR Gold Trust (NYSEMKT:GLD) is a great place to start for most investors, because it allows you access to commodity-like returns, without the vagaries of the futures markets. The world's largest gold ETF recently increased its supply of stored physical gold by 1.8 metric tons, giving further credence to the idea of increasing world demand. GLD offers great liquidity, although it won't offer the leveraged exposure to gold that McEwen or other miners will. Ultimately, while gold has performed well recently, the global story suggests that it has more room to run.