Categorized | Featured, Long Ideas

Gold Stocks Back in Vogue

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.


GOLD Video

How to take money and emotion out of the gold market.

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.

Gold versus US Dollar

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.

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Market Folly: The European Bailout Was Ugly…
ZeroHedge: Chinese Hawks Appear

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.

SPDR Gold Trust (GLD)

FD: Author does not have a position in GLD

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Gold Stocks Back in Vogue

13 Comments For This Post

  1. MiniB Says:

    I’ll take physical gold and silver, thank you. What good is a safe haven built with spit and wishes?

  2. Gary Ogletree Says:

    The junior miners are just as easy to buy and pay better than the ETFs. They double and triple while the paper metal only trails the real metals.

  3. silverwood Says:

    I was attracted to this article because the title of it is…Gold Stocks Are Back in Vogue . OK, so how come Mr. Author, why did you title this article that way and then don’t mention a word about gold stocks? Aren’t gold stocks, stocks of companies that mine gold? GLD and SLV are ETFs that sell you shares that supposedly hold gold/silver in depositories. Don’t get me wrong I think you are telling people correctly to own physical gold/silver. But to purchase quality mining shares such as GG, IAG, AEM and AUY, etc is also a good long term investment.

  4. ManAboutDallas Says:

    Danger, Will Robinson! Danger, Will Robinson! Possible SHORT-TERM TOP in gold and silver approaching. Why ? Because the Bubbleheads of BubbleVision (CNBC) are finally TOUTING gold.

    Remember that they’re the obsequious toadies and sycophant sock-puppets of the CrimNakes, so if they’re – FINALLY! – telling you to BUY gold, it’s so their PuppetMeisters can SELL to you.

  5. jrj90620 Says:

    I’m thinking ManAboutDallas has a good point.In the article you state you believe(believed) gold to be archaic and are now(about 5 years late) thinking of adding precious metals to your portfolio.If someone like you finally is getting on board,maybe it’s late in the game.I’m still bullish longer term but short term may be risky.

  6. paxjds Says:

    Only an idiot or a day trader would buy GLD or SLV. Banks involved with them are technically bankrupt without Price to Fantasy accounting and government bailouts and guarantees, liabilities for CDO’s and XYZ’s. With the dollar eventually approaching nothing after the Euro and pound enter the toilet, the music will stop and GLD/SLV will not be worth the paper your shares are printed on. There will be a run on GLD/SLV before the decade is out. Don’t buy gold certificates as they are risky. The Canadian Bank of Nova Scotia recently got caught selling certificates with charging storage charges and none of the customers Gold was in the Vault!!
    Real Physical Gold is Real Money, not a Ponzi scheme like the paragraph above. The department of Justice is investigating 6 major banks as I write this. With the crooked politicians apparently supporting crooked enforcers, not much will happen other than a few minor bust, just look at 2002. That’s why I got out of the financial products industry :No honor, law breaking company and firms. So I ask you to please advise you clients of the Risks involved in doing business with GLD/SLV/bullionbanks/etc. Tell them to buy physical gold and silver. If not, is it not your duty to get out of the CFA business. GLD only tracks the price of gold. Real investors buying real physical gold cause the price to go up or down.

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