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.

By Anthony Mirhaydari Apr 27, 2012 1:20PM

Image: Golden Nest Egg (© Chris Collins/Photographer)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 anthony@edgeletter.c​om and follow him on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.

 

12Comments
Apr 27, 2012 5:38PM
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I agree with Tony, I got in gold last week, I am just don't see how the dollar can hold its value in the short term.
Apr 27, 2012 5:28PM
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I buy this, esp. if the Chinese reserve knows what's good for them and loosens trading restrictions on the yuan, the dollar's value will fall. 
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I started buying silver at a young age. Silver was going for $3.45 a ounce. People said I was stuped for waisting my money on something that would never make a profit. That was 38 years ago. I bought silver when ever I could. I steal by silver to this day. Yes it has been slow to make a nice profit, but I am in this for the long run and not short term profits. I can see silver going for around $150.00 to $250.00 a ounce by 2017. By then we will have QE-8 OR 9. Lets face it folks. Our Government has out done themselves this time with al the printing of worthless money. I can't blame the other countries around the world for wanting to dump U.S dollars fast. We need to return to the gold standard and repair our credit. No, we will never be a 1st class country again that aids and repairs the whole world. Lets repair things at home and get people back to work . Lets spend more time with family and friends. It's steal a good time to buy silver or gold if you can at this price. The people that use to laugh at me so long ago don't laugh so much now. Remember this is for long term. You will see ups and downs in the market before we hit that higher price.Smile
Apr 27, 2012 6:33PM
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I have been in gold and silver since 1996!  What a ride and the fundamentals are even more positive for being in them now than ever.  I love the Jr mining companies (the leverage is just crazy when you invest in the right ones) but there is nothing like holding the physical bullion itself.  Silver will be the invest for this year and possibly decade, just ask Theordore Butler or James Cook.  Percentage wise it will out perform gold for a while.  Start now while you can because inflation in coming and no currency (fiat) has lasted forever (except gold and silver).
Apr 27, 2012 6:14PM
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If you add food and fuel into inflation, you are ;looking at 4 % inflation.
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.

Apr 27, 2012 7:57PM
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Up here in Canada we will be droping the penny. By the end of the year we will have a new one "The US dollar".
Apr 27, 2012 8:02PM
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Gold may be shining, but agriculture is doing better
Apr 29, 2012 9:50PM
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The chickens are coming home to roost sooner than people think.  The Euro zone    countries are in serious debt  trouble starting with Greece,then Spain followed by Italy.  As you have seen over the past few weeks, the slightest bad news coming from Europe spooks our market.  As. Europe goes, so does the American stock market.  Time to take as much protective action as possible for your assets.
Apr 28, 2012 8:15PM
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Pepperoni,

TheS&P 500 is up 40% since Obama took office. Silver is up 200% You really are a loser aren't you?

Apr 27, 2012 8:44PM
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i hope that tony is right.i have been invested in brd for about 9 months and losing. if the stock rises for the next 12 months then i would probably sell it at 1.50 .it went down to about .70 and its been as high as about 2.00 . i think that since tony  is recommending gbg , then brd should appreciate even more. brd mine is in canada which is a lot less risky than having a mine in south africa .right /
Apr 27, 2012 3:27PM
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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!!!

Apr 27, 2012 7:07PM
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When Obama got elected, I jumped into the stock market...........been riding the wave of Ford, Bank America, Apple and Intel ever since.    Laughing all the way to the bank.   So you think we did well under Bush?   Not sure how long it will take the US to recover from his administration.
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