JPMorgan Advises to ... Buy Gold?

With the ongoing musical chairs at the COMEX (focused on JPMorgan's volatile holdings), the bank's precious metals team now sees a number of reasons to be long gold. Noting the market's shrugging off of Paulson's unwind ("delivering an exclamation mark to define the end of the fall in gold stocks"), JPMorgan (ironically) suggests the questionable price action in the paper markets in light of unprecedented physical demand combined with the seasonal positives (and physical supply restrictions) all points to "getting long the gold space," with gold and silver miners offering value. The question remains, given that none of these are 'new' facts, why the change of heart now (especially as JPM is also buying)?

Via JPMorgan,

Gold shrugged off news today that Paulson & Co had cut its exchange listed gold exposure in half and rose 2.2% to $1,365/oz. This may be delivering an exclamation mark to define the end of the 10-month, 25% fall in gold and 50% fall in gold equities, (while the S&P advanced 13%).

The World Gold Council reported today that physical gold demand remains strong, questioning the price weakness seen in paper markets. Additionally, gold supplies could be constrained in September if labor strikes are initiated in South Africa. There’s typically some positive seasonality to the gold price in August/September helped by India, which is still the largest single (28%) gold market.

Often this strength correlates with the Denver gold conference. The conference attracts many of the larger gold investors and given the other positives for the metal (and that the depressing effect of the Q2 results is past) we would not be surprised to see a stronger gold price in the run up to the show. We’d encourage shorter-term investors to consider getting long the gold space with a four to five week time horizon. This year the Denver Gold Forum will be from the 22nd to 25th September.

The World Gold Council shows that gold demand remains strong. China and India remain large physical buyers of the metal. We believe this highlights that enthusiasm for the metal remains strong amongst the majority of the world’s population. Indian demand is quite seasonal related to events and festivals. While some might argue for less Indian buying due to tougher regulations and the weaker rupee making the metal more expensive, the WGC data suggests the opposite. Perhaps fear of currency weakness lifts buying.

Paulson &Co’s gold purchases in 2010 put the spotlight on the metal, so it’s encouraging to see that the market was not disillusioned today after it was disclosed that this position was cut in half. Perhaps this news was seen positively because the overhang has been removed. The gold market may also have reacted to lower risk of "tapering”.

South African gold supply could step down in H2. South African wage negotiations have moved into a mediation phase and could move to plans for strikes by as early as next week. While South African production has fallen and it is now only about 5% of mine supply, production could step down again, given the significant wage demands, which could make parts of the industry there uneconomic.

Our favorite gold stocks are Goldcorp (GG), Eldorado (EGO), Newgold (NGD) and Newmont (NEM). Silver often offers higher beta precious metals exposure. Our favorite silver stock is Silver Wheaton (SLW), and Coeur (CDE) and Hecla (HL) offer leverage.