How to make the most of golden plays – by BJM PCS

Gold looks good in an increasingly jittery world, but it’s still not a one-way bet and judicious plays are necessary to make the most of recent trends underpinning the yellow metal. Even some profit-taking may be in order.

That’s the gist of the advice going out to high net worth individuals from Barnard Jacob Mellet Private Client Services (BJM PCS), a financial adviser and service company with special focus on this market segment.

In his latest report to clients, Hobs Mojalefa, head of trading at BJM PCS, acknowledges that by February-March the gold price had “finally reacted in line with anticipated logic as the ultimate hedge”.

Since bottoming out in 2001 around $250/oz, the gold price has risen fourfold to near $1000/oz and is threatening to break above this level.

Over the same period, the local gold index has gained 205%. More recently, skittish market conditions, low investor confidence and uncertainty in several sectors of the US economy have plagued investor nerves and sent them scurrying for cover, with many seeking refuge in gold.

Even so, “2008 was not a pretty year for the gold companies”, says Mojalefa as the industry was plagued with poor ore body grades and uncontrollable cost increases. However, in the final quarter of 2008 the gold price rallied significantly and helped most of the gold producers to turn profitable.

The gold-producing companies are looking far healthier on the back of this rally. But Mojafela warns: “The current insatiable demand for gold calls for some attention.

“We place very little emphasis on gold and gold companies as a long-term investment destination, given its highly unpredictable nature and extraordinary high volatility, (yet) traders have been able to benefit from the meteoric rise in the gold price by trading the listed gold companies.”

He suggests that “a far cleaner play than the gold companies themselves” is a gold exchange-traded fund that benefits from a firmer dollar gold price and a weaker rand.

The more active and speculative traders have traded gold warrants and contracts for difference that provide gearing and are currently the aggressive trader’s favourite short-term trading instrument.

Mojafela adds: “Gold has had an exceptional run and while the picture is looking positive some profit-taking at the resistance level of $1000/oz would certainly do no damage to the bull trend.

“Our trading strategy would be to use weakness to accumulate positions in the instruments that would benefit from a firmer yellow metal price.”