As sovereign debt fears shift to the fore, governments continue to spend money and global central banks keep interest rates relatively low, gold remains appealing and for good reason.
Gold is so attractive due to its ability to offer protection without the volatility of other metals like copper, or commodities like crude oil, which are highly dependent on the overall health of global economies.
Additionally, it appears like the shiny metal is reaping benefits in more ways than it is used to. Traditionally, gold has been used a hedge against a weakening U.S. dollar but many analysts suggest that the dollar-denominated metal will continue to appreciate in value even as the dollar rises. The driving force behind this is the debasement of other currencies, in particularly the Euro and other European currencies of nations who have gobbled up so much debt that they need an astronomical amount of cash to avoid default.
Another factor that is likely to support gold prices is the uncertainty in the ability of the Obama Administration’s ability to curb spending and reduce the budget deficit. In fact, most economists suggest that the United States’ budget deficit for the current year will hit $1.6 trillion. This deficit is unlikely to ease up due to the massive amounts of money the government has borrowed money to fund stimulus packages and make up for lost tax revenues, which is accumulating interest.
Lastly, at least in the United States, interest rates are expected to remain low. Chairman of the Federal Reserve, Ben Bernanke, and other prominent Fed officials have openly stated that low interest rates are required to foster an economic rebound and that interest rates will be raised as soon as the economic recovery is fully entrenched. With the labor markets still relatively unstable, an embedded economic recovery will likely not be seen until the end of the year or well into 2011.
Although gold prices are off of their 2009 highs, there are numerous positive forces that are likely to support and drive the price of the precious metal.
To gain access to equities which actually hold physical gold bullion, one can take a look at the SPDR Gold Trust (NYSEARCA:GLD) or the iShares COMEX Gold Trust (NYSEARCA:IAU). GLD and IAU closed at $107.95 and $108.05 on Friday, respectively
Other ways to play gold include investing in futures contracts and this can be done through the PowerShares DB Gold Fund (NYSEARCA:DGL), which closed at $39.36 on Friday or the PowerShares Ultra Gold (NYSEARCA:UGL), which gives one leveraged exposure to gold and seeks to gain twice the return of the metal. One thing to keep in mind when utilizing leveraged ETFs is the affect compounding has on returns. UGL closed at $44.68 on Friday.
To indirectly play the gold markets, one can look at the Market Vectors Gold Miners ETF (NYSEARCA:GDX) or the Market Vector Junior Gold Miners ETF (NYSEARCA:GDXJ), both of which primarily hold companies that are involved in the gold mining industry. GDX closed at $44.99 and GDXJ closed at $25.77 on Friday.
When in vesting in these aforementioned equities, it is important to consider the inherent risks that are involved. To help mitigate these risks, the implementation of an exit strategy which triggers price points at which an upward trend could potentially be coming to an end is of importance.
According to the latest data at www.SmartStops.net, an upward trend in the mentioned ETFs could come to an end at the following price points: GLD at $106.55; IAU at $106.73; DGL at $38.99; UGL at $43.62; GDX at $43.45; GDXJ at $24.89. These price points change on a daily basis as market conditions fluctuate and updated data can be found at www.SmartStops.net.
Disclosure: No Positions