VANCOUVER (CP) -- Gold may be regaining some of its glitter.
After an 18-month downturn in the sector, Paul Taylor, chief investment officer at BMO Harris Private Banking, says gold stocks are beginning to show signs of new life.
''All of a sudden, in very short order, the tide seems to have turned and there is a lot of interest in the gold sector,'' Taylor said in an interview.
The S&P/TSX capped gold index has turned upward in recent weeks after trending down since the end of 2003. The index closed Thursday at 185, up almost 11 per cent from its recent low, as bullion gained $7.40 on the day to close at $422.70 US in New York.
Taylor pointed to two principal ways of taking advantage of a rising price for gold - investing in the commodity [], or buying shares of gold companies.
''Of late, one of the big tradeoffs is, with the rising cost of energy and foreign exchange and other things, a lot of the gold companies have struggled in terms of managing their operating costs and being able to deliver bottom-line profitability,'' he said.
Both types of investment depend on the underlying price of gold.
''One is the commodity strictly speaking, the other is the commodity and the potential of a big find and the ability of a particular company through prudent management of their firm to provide leverage,'' Taylor said.
He pointed to several possible reasons for a strengthening in the sector, including weakness in the U.S. dollar and a seasonal characteristic to the commodity.
''Gold and gold stocks are relatively cheap in early summer and then they become more expensive into the fall,'' said Taylor, adding that in 14 of the past 16 years, bullion and gold shares have risen by an average nine per cent and 24 per cent respectively from early summer to early fall.
''Bullion tops in the fall as jewellery demand peaks in advance of Christmas and the holiday season,'' he said.
''Statistically there is a seasonality to both bullion and gold share prices.''
He also pointed to a historical relationship between oil and gold, with an ounce of bullion averaging 15.7 times the price of a barrel of oil over the past two decades.
''If you assume oil settles in at $50 a barrel and take 10 times that you'd expect gold to trade at $500 per ounce,'' Taylor said.
In the past, investors have regarded gold as a shelter from a stock market crash or a fall in currency. However the value of gold is now volatile and it is by no means a sure bet. Gold traded over $800 per ounce in the 1980s, but slipped below $350 per ounce in the 1990s.
Looking to capitalize on recent interest in gold, two exchange-traded funds have been launched in recent months that track the commodity.
The StreetTracks Gold Shares ETF on the New York Stock Exchange debuted late last year, followed by an offering by Barclays Global Investors in January.
In Canada, investors have the Millennium BullionFund, managed by Bullion Marketing Services Inc., which holds equal proportions of gold, silver and platinum. There is also the Central Fund of Canada [CEF] and Central Gold Trust [GTU-U.TO]
Nick Barisheff, president of Bullion Management Services Inc., said holding gold is a useful way to diversify a portfolio against a downturn in stocks, bonds, real estate and financial assets.
''If your portfolio is basically only long in one direction and the market is going the other direction, you've got a big mess on your hands,'' he said.
''What's happened over the years is stocks and bonds used to be somewhat negatively correlated, but lately they've become positively correlated, so the traditional view of holding stocks, bonds and cash and you're fully diversified'' no longer holds.
Barisheff equated holding gold in a portfolio to buying house insurance.
''If it is working, the rest of the economy isn't particular pleasant,'' he said.
''You need fire insurance and I think you need portfolio insurance. You can't simply go long on stocks and bonds and presume that there will be a never-ending bull market.''
(c) The Canadian Press 2005
