Inverse ETFs are a great bear market option, but they may still appear too risky for investors looking for longer term safety. Gold, an investment known for its safety and reliability, though generally not the most exciting of investments, can provide a sanctuary for long term investors.
I am often asked, "Gold is near its all-time high, do you really think it will continue to rise?" Yes I do. As many know, when adjusted for inflation, gold is actually still a bit below its all-time high. As shown on the graph below, which is priced in current U.S. dollars, gold's peak occurred in 1980 when it reached a then $850.00, a price of $2358.04 in today's dollars.
(Image source: inflationdata.com)
As of this writing, gold is trading in the $1750.00 range, about $600.00 below its all-time high. Also, with the potential of devaluing currencies (discussed in the next section), gold could easily climb above its previous high, an inflation adjusted price of $2337.00.
But let's take a look at gold's performance in the tumultuous 2011 markets to gain an understanding of its potential performance in future volatile and/or bear markets.
Above is a one year graph of gold (kitco.com) and below is a one year graph of the S&P 500.
Click to enlarge:
Looking at the two graphs, one might begin think that gold prices tend to mirror major markets, similar to related inverse ETFs. Though this is in no way true, it is safe to say that when fear dominates the market, wise investors tend to move into gold.
When we look at August 2011 on the graphs above, we see what many of us experienced firsthand: The S&P 500 fell hard and fast. And look what happened to gold during this time- it peaked. Do I believe gold prices will rise again in a similar future event? Yes, I do.
However, since gold remained stable during the 1929 stock market crash, many wonder why would it act differently if our stock market fell today?
In 1929 we followed the gold standard. In other words, the U.S. dollar was backed by physical gold. This gold standard was abandoned in 1933 and, therefore, does not hold true today. The value of the bills in our wallet is not backed by any physical commodity. Our money is, in fact, not money but currency; the supply of which is determined by the Federal Reserve. And this is why gold reacts to market fluctuations much differently than it did in 1929. (More information on currencies is provided in the next section.)
Related mining stocks may also prove fruitful when gold is on the rise. As gold prices climb, this will increase the profit margins of related gold mining companies. And when this profit margin increases, generally, the company's stock price will quickly follow.
In summary, gold and gold mining stocks can be a very wise investment option for those looking for safety in a bear market.
In the next section, we will further explore the potential devaluing of currencies and possible related investment ideas.
Continue to Part IV
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.