El Nino Is Coming: Time To Buy Gold?

What does an above-normal warming in the Pacific Ocean equatorial waters off the coast of South America have to do with gold?

At first glance. Nothing. But, the global weather phenomenon known as El Nino is brewing and some meteorologists place high odds that it will officially develop this year.

The last El Nino event occurred in 2009 and this year scientists are already seeing ocean waters temperature climb to above normal levels. It will take several months before the NOAA (National Oceanic And Atmospheric Administration) declares an official El Nino event —due to their strict scientific definition. But, it may already be underway.

Drew Lerner, senior agricultural meteorologist at Kansas-based World Weather Inc., estimates 80-85% odds that an El Nino event will impact global weather patterns this year. "The El Nino impact on world weather is already underway," Lerner said pointing to an already delayed start to the monsoon season in India.

In very general terms, El Nino events tend to impact certain parts of the globe in different ways, but that does include lower than normal precipitation levels in Indonesia, Malaysia, and West
Africa, Northern South America, Southeast Asia, Thailand, Vietnam and India to name a few.

Again, what does weather have to do with gold? Well, Jodie Gunzberg, global head of commodities at S&P Dow Jones Indices ran some numbers looking back at eight historical El Nino events since 1983. "The metals showed positive performance in most of the periods with average returns of 25.3% and 8.9% from industrial metals and precious metals, respectively," Gunzberg wrote in a research note. The metals returns were measured via the S&P GSCI Industrial Metals and S&P GSCI Precious Metals indices.

Sound strange? Maybe not. El Nino years are associated with drought—though they don't always correlate to actual drought years. But, El Nino events do have potential to impact a wide range of global agricultural production. If weather disrupts crop production, prices go up, and that, of course, is inflationary. Metals are a traditional hedge against inflation.

Who knows what will happen this year? But, maybe there's something more than just warmer ocean waters brewing in the macro global economic mix. Maybe there could be some inflation ahead too.

Kira Brecht is managing editor at TraderPlanet.

By Kira Brecht, Kitco.com
Follow her on Twitter @KiraBrecht