Gold Is Cheap But Is It A Buy?

Includes: ABX, GLD, IAU, KGC
by: CommodityHQ

By Jared Cummans

Everyone’s favorite precious metal, gold, had a strong year in 2011, with the commodity gaining roughly 15% in just 12 months. But the final month of the year took its toll on the yellow metal, as its price dropped from roughly $1,700/oz. to as low as $1,545/oz. marking a decrease of 9.1% in just 31 days. Though the metal still had a solid 2011, December put a major dent in the commodity’s gains, but it also created a strong opportunity for investors and traders alike. Gold broke through the $1,900/oz. mark for a brief moment last year, making its current prices look incredibly cheap. With stocks poised for an uncertain future and turmoil still swirling around the world, now may be the perfect time to buy into gold [see also Gold And Silver In A Correlation Bubble?].

Gold’s dip in the latter month of 2011 was caused by a number of factors, with a strong dollar being one of the biggest hindrances. As the euro took a nosedive, the dollar preyed on its losses as the exchange rate currently sits around 1.3, the lowest that figure has been in roughly one year. But this was not the only reason that gold took a hit, “when markets sold off, the margin clerks took over, and over-levered investors sell not what they want to sell, but what they can sell” writes Euro Pacific Canada. Another important issue has been gold’s recent correlation to equities, allowing volatility to erase value. Overall market panic may be keeping gold at an undervalued price and for investors who feel that way, now may be the perfect time to buy into this precious metal for the coming year [see also How To Lose Money Investing In Commodities].

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Ways To Play

For investors who have a strong opinion on where gold is headed, or for traders looking to make a quick return, there are a wealth of options available. Perhaps the most direct method comes from the February GC Gold futures contract offered on the COMEX. The February contract is currently the most heavily-traded future and will offer the best liquidity. But not everyone is savvy to futures markets as they can be quite complex and difficult to understand. GLD, another option, is an ETF that measures physical bullion that has become wildly popular among the investing world. For those who like the ETF structure, the iShares Gold Trust (NYSEARCA:IAU) also offers physical gold exposure at 15 basis points less than GLD. Finally, an indirect play can be made with a number of equity-based gold mining firms like Barrick Gold (NYSE:ABX) or Kinross Gold (NYSE:KGC) [see also Three Reasons Why Gold Is Overvalued].

Disclosure: No positions at time of writing.

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