With the crisis in Europe still on the radar (despite a Trillion dollar rescue package), investors have become more concerned about inflation. The beauty of the Euro when it was created was that individual governments didn’t have the ability to print their own currency. The expectation was that this would cause governments to be more conservative since they must actually match revenue to debt service costs – or at least be able to attract needed capital through issuing new bonds.
But as it turns out, the multi-country currency experiment is turning out to be a flop with the trillion dollar package to bail out Greece and other distressed countries likely to continue to put pressure on the purchasing power of the euro, and highlights the dangers of fiat currencies around the world.
The package was initially welcomed with the Euro bouncing quickly in hopes that the package would restore order to the beleaguered economical landscape. But in short order, the euro once again gave up ground to the dollar. I don’t have a lot of experience trading currencies, but both from a fundamental and technical perspective, the Euro looks to be in real danger.
Gold is Becoming the Currency of Choice
It may sound archaic, but gold is a currency that has been able to stand the test of time, and is once again stepping up as an increasingly accepted storage of value. From Europe to Asia to the US, investors are becoming less comfortable with the value of paper currencies and looking for ways to protect the purchasing power of nest eggs. I am seriously considering adding precious metal positions to the ZachStocks Newsletter portfolio as the pattern on gold and silver is very attractive.
Many of the world’s top money managers have been accumulating gold positions in anticipation of this phenomenon and while the “buy gold now” commercials are often cheesy and misleading, individual investors can take positions in gold related securities which may be very beneficial in protecting assets such as retirement accounts, education trusts, or simple investment accounts.
The most common way for individual investors to gain exposure to gold is by buying the SPDR Gold Trust (GLD). This is an etf which seeks performance related to the spot price movement of gold bullion. Alternatively, investors can buy the iShares Silver Trust (SLV) which is hitting a new 52-week high as I write.
For more sophisticated investors, there is the opportunity to buy futures contracts which can offer leverage and allow you to hedge a greater portion of your assets while only putting up a small amount of collateral. Options are another vehicle which require a thorough knowledge of how the vehicles work, but can give the investor attractive exposure. Please make sure that you understand the risks and trading dynamics before taking a position in options or futures.
The Relationship to the US Dollar
Several months ago, gold prices were trading with a negative correlation to the US dollar. This simply means that when the dollar was stronger, gold had a tendency to sell off, and the opposite was true as well.
The relationship makes sense because if investors have less confidence in the dollar, they might hold gold as a storage of value instead.
Today, however, gold is rising in lockstep with the dollar (see chart above). The US dollar is strong compared to other currencies, primarily because of the weakness of the euro. At the same time, gold is strong because of a “flight to safety” where investors are looking for the most stable place to protect the value of their savings.
The point is that both the dollar and gold are attracting scared money. But if and when the dollar begins to fall, that will likely cause even more strength for precious metals. Right now, metals are rising on their own merit – regardless of currencies. But if the US dollar weakens, metals (which are priced in dollars) will become even more valuable.
So despite the fact that precious metals are already at historically high levels, it makes sense to have some exposure in today’s uncertain environment. I would recommend setting aside a particular dollar amount that you are willing to invest in metals, and taking the next few months to slowly put that capital to work. You won’t get the best price with every purchase, but you could average into a strong position and experience the benefits of holding hard assets whose value is not subject to a printing press.
FD: Author does not have a position in GLD
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