The markets go up, gold bullion prices drop. Makes sense, right?
Then the markets rise some more, and gold prices rise too. And then, the markets go down, and gold drops right alongside them. Crazy, right?
Finally yesterday, the markets dropped and gold went up.
If you’re trying to keep score at home when it comes to how to logically trade gold, by now you’ve probably ripped up your scorecard!
I know a lot, if not most, of you are invested and interested in gold. I’m not as much of a gold bug as some of my colleagues. In fact, I’m a “stock guy” through and through.
However, when I see a solid company that just happens to be positioned in the sweet spot of the gold food chain, I sit up and take notice … and I think you should too.
This sweet spot is a businessperson’s — and an investor’s — dream … one where customers are literally emptying the shelves of their products, yet the cost of the raw material has plunged.
For one China-based jeweler, gold prices don’t matter because it’s making money from production all the way through to customer purchase …
How to Win in a ‘Heads I Win,
Tails You Lose’ Market
Last week, the Fed said it was thinking about tapering its massive money-printing stimulus. The market rallied.
On Tuesday, two Fed governors suggested tapering was a long way away. The market rallied even further!
Then on Wednesday, Ben Bernanke reaffirmed his commitment to keeping the economy afloat through money-printing … for now … but that tapering could happen in the "next few meetings." And then the market sold off!
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It’s All About Creating Supply AND Demand!
It’s rare to find a combination of “bloated margins” and “wider profits” in any industry, and especially in commodities.
After all, raw-materials suppliers often suffer from price implosion when their commodities lose market value. On top of that, retailers have to reconcile the spread between their wholesale costs and the price their products are selling at on the shelves.
At the end of the food chain, consumers increasingly find themselves squeezed between what they’re willing to pay for … and what they’re willing to pay up for.
As an investor, you know exactly what that’s like.
And so, when you’re looking for the best places to invest, something you may not consider is how much value a company adds during stages of a process.
The organization that adds value to the raw material by fabricating the products saves on the low price. It can also raise the price of the finished goods to, as Robber Baron Mark Hopkins so delicately expressed it, “what the market will bear.”
For a Great Way to Play Gold,
Get in the Middle(man)
Gold’s traditional role as an international quasi-currency literally assures that someone is likely to emerge a winner … even when the precious metal’s price implodes.
Currently the best position for profiting from gold is to be right at the midpoint of the bullion-to-jewelry production process. And as a notorious fellow named Pierre once said, “Sometimes it’s lucky being in the middle.”
While speculators in gold drown their sorrows after the recent crash in the price of the yellow metal, gold-jewelry retailers have been rejoicing as bargain-hunters, especially in Asia, bloat their sales volumes.
But the biggest potential rests with firms that buy metallic gold at current deflated quotes, add value by transforming it into jewelry, and then supply the inventory-hungry retailers.
Asia — and especially China — has become the epicenter of an explosion of gold-jewelry demand now that the price of the metal is no longer quite as precious.
An intriguing play in that region on the deflated gold price is China-domiciled and Nasdaq-listed Kingold Jewelry (KGJI).
This somewhat-speculative gold jewelry producer (shares closed yesterday at $1.22) is geographically and operationally well-positioned to benefit from the currently deflated price of the yellow metal.
Kingold: A 24-Karat Global Profit Play
Though sold across Southeast Asia, Europe and North America, the most-promising market for Kingold’s jewelry is in its home turf of China. As a member of the Shanghai Gold Exchange, the sole supplier of gold in China, Kingold enjoys a pricing power advantage and competitive one-ups over non-members.
In addition to achieving value added for gold by crafting it into jewelry, this fabricator has been enhancing customer loyalty by establishing the Kingold brand in the minds of buyers as a provider of unique jewelry design and craftsmanship.
This would move it closer to a brand recognized by clients as one providing them status, such as Tiffany & Co. (TIF), which is hugely popular in China. As you can see by TIF’s success, being a provider of status helps to cement customer loyalty.
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Kingold has reportedly also been considering a network of retail outlets keyed on the company’s name. This move would allow it to capture the entire margin between the price of gold ingots and the final price paid by retail customers.
Best of all, it can do so without the margin-erosion normally resulting from handling for intermediates such as wholesalers and distributors.
Although a relatively small firm, Kingold has been described as the largest manufacturer and distributor of 24-karat gold jewelry in China.
Of an estimated (by the World Gold Council) 776 metric tons of gold processed and sold in China in 2012, 37.8 tons were processed by Kingold, giving the firm slightly less than a 5% share of a very fragmented market.
But a small firm working at establishing a strong brand identity can produce impressive investment returns. A 5% improvement in market penetration would represent more than a 100% expansion in Kingold’s sales, in addition to any organic growth in the market.
And after a dip in sales earlier this year, buyers are coming back full-force …
What We Can Expect Next for Kingold
As the price of gold steadily eroded this year, Kingold’s Chinese customers shied away from gold jewelry. As a result, a 1.6% decline in sales coupled with a $2.8 million inventory write-down resulted in a 61.5% decline in the firm’s per-share net on a 1.6% decline in revenue for the first quarter of 2013.
But as the decline turned into a rout in April, canny shoppers decided that the price of gold … and the jewelry made from it … had become enticing again.
Across China, shelves of jewelry stores in malls and at casinos were suddenly cleaned out by shoppers. Consequently, the explosive demand has forced Kingold to elevate its projected 2013 need for gold to the range of 50 to 60 metric tons, an increase of 32% to 59% over its 2012 consumption.
The outlook appears definitely bright for this Chinese crafter of jewelry!
If you’re trading on your own, be sure to do your research and use caution. And if you’d like some expert guidance — complete with timely buy and sell alerts on opportunities to profit from what world consumers are buying — join me risk-free in my Global Trend Trader service today. Click here to learn how!
P.S. The surge in the number of middle-class and affluent Chinese means that companies like Kingold are well-positioned to sell quality products to the huge-and-growing marketplace for status, luxury and convenience items that were out-of-reach to so many of them not too long ago.
To find out how my Global Trend Trader members are cashing in on this vital demographic — and three other huge trends — in 2013, click here to watch my video report on these mega-trends now.