Hedging Against The European Union's Economic Collapse

Includes: GLD, IAU, PGLC
by: Randall Radic

The European Union's problems just keep growing. First, it was Greece, which could still implode at any moment. Now it's Spain, which needed a $100 billion loan to prop up its economy. And the pundits say Italy and Portugal are not too healthy, either.

When investors think about hedging, one thing that comes to mind is gold. Keeping the money close to home does not hurt either. That means either Canada or the U.S. Let's focus on the U.S. for right now, specifically, Nevada, which has a lot of natural resources, including gold mines like Pershing Gold (NASDAQ:PGLC) and/or Newmark Mining.

Investing in gold is a great way to hedge against Europe's economic collapse and its ripple effects on the rest of the world. Any intelligent investor will want exposure in this market over the next few years. If you want leveraged speculation in exploration you want to delve into Nevada's gold mining companies. It's not surprising that the talented, mobile and efficient newer mining companies are the ones that make the most resource discoveries, not the majors.

The goal of hedging is to invest in the most promising companies when they are quite small. There's an old saying in the mining game: 'Give some money to good people and very often they will discover something." In other words, tapping directly into the talent pool allows a company to nurture its advantages. The size of the company does not really matter. What matters is talent and access to potential resource properties. Small is not synonymous with bad when it comes to gold mining. The smaller companies have the potential to multiply in price if and when they explore successfully.

There's another reason to invest in Nevada's gold mining properties: dollar diversification. No matter how widely diversified your investments are in different sectors of the economy, gold is the only true hedge against currency depreciation. For example, in 2003 the price of gold averaged just over $300 per ounce. Presently, it takes just over $1500 to purchase an ounce of gold. In other words, even if the mining stocks remained flat (which they did not), currency appreciation would have been over 400%.

That's a pretty safe hedge.

The European Union has deep subterranean problems. The European Council's Van Rompuy has come up with an all-encompassing Grand Plan. This magical plan will provide for a European Treasury that has budgetary power over every nation in the EU; protect Eurobonds; provide a banking union that guarantees deposits; and of course, implement a bailout of all the banks. Enabling the Grand Plan requires a unified taxation policy, and regulated employment. And that sounds just like Orwell's Big Brother. The plan behind the Grand Plan is the mutualization of debt. Translation: Germany gets to pay for everything, because Spain, Italy, Greece and even the U.K. are in financial meltdown.

There's not enough money in the world to prop up the EU's failing economies. And when the EU finally succumbs to the Humpty Dumpty syndrome, the resulting splash, a veritable tsunami wave, will carry all the way to the U.S. So what does a smart investor do? He protects his money. He looks around for a way to hedge. Gold mines are a good way to hedge. At the same time, investors that hedge by investing in gold mines like Pershing Gold or Newmark Mining will protect themselves against currency depreciation. Some experts believe that the U.S. is in a commodities bull market at the present juncture. Others maintain the bull market has ended. Nevertheless, despite the varying opinions and market fluctuations, the price of gold is still phenomenally high.

Bottom line is this: speculation in resource exploration stocks (gold mines) is the best way to hedge against what's going on in Europe.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.