Gold shines as dollar stumbles
After months in the doldrums, precious metals and related mining stocks are perking up in a big way as the dollar drops.
With the economy performing in fits and starts, investors have sought safety in numbers -- crowding into the latest hot trade. Right now, it's Apple (AAPL). But for a long time, it was precious metals. Gold led the way in 2009 and 2010. Silver had an epic run-up in late 2010 and early 2011 before crashing hard as the dollar jumped after Seal Team 6 brought America's justice to Abbottabad.
Over the past year, most people couldn't be bothered with the shiny stuff, with both silver and gold mired in big, persistent downtrends. Silver is down more than 37% from its April 2011 high. Market Vectors Gold Miners (GDX) is down more than 30%. Gold had a nice run after the U.S. Treasury lost its AAA rating last August, but it has been grinding lower ever since.
That's all changing now as the dollar weakens in a big way on expectations of more currency-debasing stimulus out of the Federal Reserve. Here's why and how to participate.
The chart above says it all. PowerShares DB U.S. Dollar Bullish Index Fund (UUP), which tracks the performance of U.S. dollar futures, is falling out of its long multimonth consolidation range as it crashes below its 200-day moving average.
The last time this happened was back in late 2010, which also happened to be a great time to get into precious metals. Gold and silver are seen as real, tangible alternatives to fiat paper currency like the dollar. So when the dollar is weak, investors looking to protect wealth (and nab some profits) flock to the precious stuff.
No surprise, then, that after UUP lost its 200-day average in September 2010, and until it hit bottom in mid-2011, gold jumped 24% while silver posted an impressive 150% gain over just seven months.
There are plenty of reasons to think another big run higher is coming. The eurozone crisis is getting worse, with analysts at S&P handing Spain a two-notch downgrade last night. Inflation is creeping higher but is being dismissed by central bankers more worried about growth than prices. The Fed seems committed to another round of quantitative easing at its June policy meeting. And the credit rating agencies will no doubt take another hatchet to our credit rating with no solution to Washington's debt and deficit problems in sight as a fiscal cliff -- the subject of my column last week -- approaches in early 2013.
All are positives for gold and silver.
Investor sentiment toward precious metals and related mining stocks is also very low, which is a positive contrarian signal. According to Sundial Capital Research, newsletter writers are recommending a large net short position in gold for one of the few times in the past 10 years as speculators trim their positions. At the same time, assets in the Rydex Precious Metals Fund are at their lowest level since the 2008 financial crisis. Before that, you have to go all the way back to 2003 to see a lower level of investor interest in gold mining stocks.
And finally, Tom McClellan of the McClellan Market Report notes that gold seems to operate on a 13 1/2-month cycle. His work suggests gold is due for a major cycle low and should spend the next year marching higher. His interpretation is that "we are seeing a multiyear opportunity to get into gold mining stocks at cheap prices and at a time when 'everybody' seems to hate them."
To profit from the move, I've added a number of precious-metals positions to my Edge Letter Sample Portfolio, including VelocityShares 3x Gold (UGLD) and Aurizon Mines (AZK). I'm expanding that exposure with Midway Gold Corp. (MDW) and Great Basin Gold (GBG).
Trading update: I covered my remaining short exposure Thursday after profiting from the shallower-than-expected pullback in a number of key sector groups -- energy in particular. The medium-term trend has changed as stocks invalidate a big head-and-shoulders reversal pattern. My long-term outlook is still negative.
Highlights include a 29% gain in National Bank of Greece (NBG) short, a 13% gain in Direxion 3x Daily Emerging Market Bear (EDZ), a 15% gain in Direxion 3x Daily Energy Bear (ERY), a 23% gain in Basic Energy Services (BAS) short, and a 5% gain in Vishay Intertech (VSH) short.
Disclosure: Anthony has recommended GBG to his newsletter subscribers.
Check out Anthony's investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up. Contact Anthony at firstname.lastname@example.org and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.
Even the Fed understands they can't continue to print money and prop up the democrats.
That won't bother Obama though, he will continue to borrow and spend wherever possible, Thankfully the Republican house has kept us in the game by stopping his spending.
i bought gold in April of 2008 as soon as i saw that we were going to elect a quasi socialist, either Clinton, or Obama.
Let the handouters talk all they like, get out of the market, buy gold, take physical possession of it, bury it in your back yard if necessary.
Should the country lose it's collective mind and reelect Obama, almost certainly he will attempt to make private ownership of gold illegal. There is just too much money sitting in gold, that he can't touch, because people are not going to invest money anywhere he can get a shot at it in taxes. My money bwill stay in gold until Obama is an esoteric historical footnote.
TheS&P 500 is up 40% since Obama took office. Silver is up 200% You really are a loser aren't you?
You got to be kidding - gold!!! Assets - you got to be kidding also. When Obama is reelected we'll be able to buy anything for pennies on the dollar, if we have a dollar!!!
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Serious issues like drought and the deterioration of the developed world spell opportunity for this industry leader.
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