Earnings season is upon us and by the looks of it things may be a little gloomy. Certainly it depends on whether you are a glass half full or half empty kind of person but ultimately, no matter our personal bias, reality will step to the fore.
Recent testimony from our pal Ben Bernanke, economic reports like the one from the Philly Fed and some of the first earnings reports and projections (UPS anyone?) must have put a smudge on the gloss of the half full glasses. Distinct avoidance and denial within the "Bernank's" testimony last week, although he admirably answered many stupid questions, did little to clear anything up.
What we know is what we know: the tepid recovery may be slowing and the Fed will do what it needs to do but for now it is doing nothing until such time that the recovery/slowdown worsens.
So what about gold?
Gold backers like Peter Schiff and Goldman Sachs ($2000 by the end of the year) have yielded little to the calls for gold's last days as a safe haven. I agree with Schiff and Goldman and I also think gold is not just a safe haven. It is a vital and viable means of exchange; real money. The correction gold is tolerating these days is very reminiscent of the correction back in 2008 and I am certain it is no more than that - a correction.
Gold spot prices hit a historical high in March of 2008 at $1011.25. Prices then fell for 8 months, with a whole lot of volatility, back down to $712.50, a 30% giveback. What's reminiscent about that pullback was the similar smack-talk that accompanied that price decline as is accompanying this one. Gold was over. We'd never see $1000.00 ($1900.00) again. Gold is a relic. And there was Peter Schiff, claiming gold would hit ever greater heights. Well he, me and a bunch of others were correct (Yeah me, right here at Seeking Alpha).
Gold did bottom that November and we all know the circumstances which propelled it through $1000 and higher.
(click to enlarge)
From that November low gold went on a nearly unmitigated tear. It eventually peaked in a parabolic spike near the end of the summer of 2011 after having pierced through the much anticipated $1900.00 barrier, a nearly 270% increase. Which brings us to today and back with Bernanke, Schiff, the crappy "recovery" and the debate over gold.
It might be refreshing for me to take the other side and proclaim gold's demise, but I can't do that. The scary thing is that circumstances in the US and around the globe are actually worse, not better, when you consider all that has already been done to fix the myriad problems.
Yeah, we can quibble over a variety and multitude of statistics but if we knew back then how little progress we'd experience through today things would probably have been handled a little differently. It's been 6 years since the peak of the housing bubble, that great machination of the Federal Reserve and the US government that helped us create artificial wealth and a massive credit overhang. SIX YEARS! We're still talking housing recovery. We still having exceptionally high unemployment that the sitting president wants us to believe is an improvement. After the fall we had you could argue that all these improvements are nothing more than a dead-cat bounce!
All that stimulus has done very little to improve things in the US. And let's not discuss Europe, or the slowing Emerging Market countries. I think things can and will improve but not for many years, and probably not without another recession.
Gold's correction this time from $1900 to just under $1600 is far less percentage-wise than it was in 2008 but about the same in dollar terms, $300.00 per ounce. A decline on a percentage basis commensurate with the correction in 2008 would take it down to about $1330.00 ounce. I don't see that happening.
Gold is important for more than just defending oneself from the questionable actions of central banks around the world. And the financial crisis has made it known that gold ownership is necessary, for both people and governments.
Many emerging countries are actively buying gold. Developed countries are buying gold. People are still buying gold. Sellers of gold, individuals or nations, are selling 'cause they need the cash. Don't be fooled. Gold is here to stay. Could the correction worsen? Of course. Will gold be worth more in the future? Yes, and probably worth a lot more.
If you are thinking of selling gold now you probably missed majority of the correction although the price per ounce could decline further from here. If you are long gold but concerned about a longer correction, you can hedge your position with an inverse gold ETF. The Deutsche Bank AG DB Gold Short ETN (NYSE: DGZ) can do a good job of offsetting additional downward movement. This does however commit you to a bit of market timing. If you are really confident of further declines you can use the ProShares UltraShort Gold ETF (NYSE: GLL), a leveraged ETF which attempts to provide two times the downside in the price of gold.
I'm confident of a gold turnaround and ascension to higher levels so I'm holding my long position and holding cash to buy more. An obvious choice to initiate a long position is the most commonly traded gold ETF, the SPDR Gold Trust ETF (NYSE: GLD). There are other options which should be used to diversify your gold holdings if you are primarily utilizing ETFs to establish your gold exposure.
The ETFS Physical Swiss Gold Shares (NYSE: SGOL) is an ETF which provides exposure to physical gold held in vaults in Zurich, Switzerland while the ETFS Physical Asian Gold Shares (NYSE: AGOL) represents gold bars held in vaults in Singapore.
So whether you believe gold will go lower or break to new highs there are certainly ETF options to satisfy nearly any perspective. My suggestion: Save your paper money and get ready to dip your toe back in the gold market. The next time you buy gold you'll probably end up keeping it for many, many years.