As market volatility continues to prevail and economic recovery concerns continue to draw attention, the appeal of gold remains intact and for good reason.
First, the shiny metal has appeal due to its scarcity. The primary driver behind this is a 3% decline in global mine production. This, coupled with increased demand, will leave a supply and demand imbalance which will likely result in positive price support.
Secondly, the inevitable fear of inflation continues to loom. With the Federal Reserve continuing to keep interest rates at record low levels, the printing of excess money and the massive amount of debt that is accumulating from excessive borrowing, these decisions will eventually catch up to the country and result in inflation, if not hyperinflation.
Additionally, there is no real relief from the revenue/expenditure imbalance seem in Washington. For the first time in 26 years, in the month of April, when revenues from income taxes are collected, the U.S. Treasury reported a monthly deficit. With unemployment at stubbornly high levels and corporations reluctant to hire, the revenue stream from taxes will continue to suffer in the near future.
To further add to the shiny metals appeal, gold is being used as a monetary asset illustrated by a broad shift in central banks’ attitude towards gold. Nations such as Russia, the Philippines, India and China have all increased their gold holdings to strengthen their balance sheets, decrease risk and mitigate risk against the potential decline in the U.S. dollar.
Lastly, gold has strong fundamentals and remains relatively cheap when compared to the metals inflation-adjusted peak from the 1980s. In fact, at current prices, the metal is about 50% below this peak and has plenty of room to head upward.
Some ways to play gold include:
- SPDR Gold Shares (GLD), which closed at $117.21 on Thursday.
- iShares COMEX Gold Trust (IAU), which closed at $11.74 on Thursday.
- PowerShares DB Gold (DGL), which closed at $42.63 on Thursday.
- Market Vectors Gold Miners ETF (GDX), enabling one to gain exposure to gold mining equities, which offers leverage to gold price appreciation. GDX closed at $49.38 on Thursday.
Although gold will likely remain the ultimate safe haven and is poised for positive price support, it is equally important to consider the inherent risks involved. To help protect against these risks, the use of an exit strategy which identifies price points at which an upward trend could come to an end is of importance.
According to the latest data at www.SmartStops.net, these price points are GLD at $115.28; IAU at $11.55; DGL at $42.02; GDX at $47.74. These price points fluctuate on a daily basis and are reflective of market volatility.
Disclosure: Long DGL