As fear continues to hover over the global markets, investors continue to seek the ultimate safety blanket, gold, pushing the precious metal north of $1,200 per ounce and pulling gold related equities along the way.
Typically, this time of the year is slow for gold, however, the highly sought after commodity has been on the move, causing some analysts to call the shiny metal the world’s new currency reserve and hint that this elevated trend is likely to continue.
Despite the recent $1 trillion bailout move in Europe, continued concerns about the overall Euro Zone’s fiscal health and strength of its currency continue to add concern in the region and overall market stress. In fact, the massive infusion of currency has raised questions about whether the Euro Zone has increased its exposure to risk, rather than bailing out its troubled nations. Additionally, the debt problems in nations like Greece, Portugal and Spain are so severe that a $1 trillion solution will not ratify the situation overnight or mitigate the risks in the region.
A second force that is likely to support gold prices is the slow and steady recovery of the U.S. economy. Granted, employment numbers are improving, as illustrated by the fourth straight weekly decline in first-time claims for jobless benefits, but the Fed continues to print money to support the recovery efforts. In fact, the Fed doesn’t expect the overall unemployment picture to significantly improve until sometime next year.
To add more stress to the U.S. fiscal overview, the U.S. trade deficit continues to widen. The Commerce Department recently reported that the trade gap rose to a seasonally adjusted $40.4 billion in March, illustrating that imports continue to supersede exports. This imbalance generally carries trading costs which could further dampen the stability of the U.S. dollar.
Lastly, gold continues to defy the trends of only rising when the U.S. dollar falls or risk appetite diminishes. This indicates that investors are utilizing the precious metal as more than just an insurance policy and could potentially see it as “the golden ticket” asset which holds its value.
Some ways to play gold include:
· The SPDR Gold Trust (NYSEARCA:GLD), which is backed by physical gold bullion. GLD closed at $121.40 on Wednesday.
· The Market Vectors Gold Miners ETF (NYSEARCA:GDX), which holds companies involved in gold mining. The industry is likely to see healthy margins in the near future due to a moderation cost structures which were previously seen and caused by upgrades in mines, heightened labor costs and rising energy prices. GDX closed at $53.43 on Wednesday.
· PowerShares DB Gold Fund (NYSEARCA:DGL), which holds futures contracts in gold. DGL closed at $44.29 on Wednesday.
When investing in gold, it is equally important to keep in mind the inherent risks and volatility that are involved. To help protect against these, the use of an exit strategy which identifies specific price points at which an upward trend could come to an end in the mentioned equities is important.
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 $116.24; GDX at $49.16; DGL at $42.57. These price points change on a daily basis as market conditions fluctuate and are reflective of market volatility. Updated data can be found at www.SmartStops.net.
Disclosure: Long GDX, DGL