How to Profit from the Most Overbought ‘Commodity’ Today

• U.S. Dollar could fall 17%
• Gold: next stop $1,650 / oz
• Junior gold miner lets you buy gold for $120 / oz

I hesitate to mention this ‘commodity’, just because it’s not a commodity in the strictest sense of the word. But in many ways, it is the most influential commodity in the world. No, I’m not talking about oil, or gold or even water.

This commodity trades hundreds of billions of dollars in volume every day, and its price swings effect everything from your heating bill to your food costs, gas, gold, silver – everything.

This über-commodity, ironically, has practically limitless supply, and what’s more, the entire world reserves are managed by a cartel of producers who can increase or decrease supply at any moment.

Pretty sweet gig if you can get it.

Right now, this commodity is trading near its 4 year highs. The last time it was this expensive, it dropped about 17% in 9 months.

Sometimes it’s easy to get caught up in the particular supply/demand trends of whatever commodity you’re interested in, and to ignore this macro-macro force that frequently overwhelms even seasoned investors.

What am I talking about? It’s called the dollar. As the world’s reserve currency, everything is priced in dollars, so dollar fluctuations are an important function of any commodity play.

To illustrate my point, I’ve posted two charts below. The first is a chart of the U.S. dollar, and the second is a chart of the price of gold.

Here’s a chart showing the dollar’s roller coaster ride over the past 4 years:

You can see how every time the dollar index broke through 86, it corrected nearly 17% (from October 2007 to April 2008, and again between March 2009 and December 2009).

During those same periods, gold skyrocketed as the dollar fell:

From October 2007 to April 2008 gold saw its price rise 33% from $750 up to $1,000 an ounce. From March 2009 to December 2009, it rose 33% (again!) from $900 up to over $1,200.

If gold gains another 33%, it would be close to $1,650 an ounce. Eerily, gold seems to be acting as a double inverse dollar play. Every percentage decrease in the dollar index is reflected as a two-fold increase in gold’s price. Pretty neat.

As I’ve said before, I don’t like the idea of telling anyone to buy something when it’s near its all time dollar-denominated highs. But when the dollar appears to be due for a fall, and there’s no other currency that’s showing any kind of strength, it’s tough not to be bullish on gold.

While I’m on the topic of making precarious remarks, I need to print a correction to my statements in yesterday’s issue of the Resource Prospector, as well as an apology to my colleague Jason Cimpl, editor of Trademaster Daily Stock Alerts.

It’s almost splitting hairs, but I somewhat mischaracterized Jason’s time horizon for his bearishness on gold. To be clear, Jason is currently ‘long’ gold in his Trademaster portfolio. If you’d like to see how he’s playing the trend, you can click here to see what his great trading alert service is all about.

My mistake was a matter of terminology. For an active trader like Jason, his holding period for any ‘long’ position might be a few weeks or a couple months at the most. So he’s ‘long’ gold – but not over the next 18 months.

As a long-term investor, I’m not a big fan of transaction costs and short term capital gains, so when I buy a position I like to be in it for the long haul.

I’ll quote Jason from a conversation we had yesterday, which seemed to clear up my misunderstanding:

“Short term, gold is influenced by velocity. Over long term it is impacted only by [money] supply.”

So, apologies to Jason for my mistake.

I don’t necessarily agree with Jason’s assessment that gold will move lower over the next 18 months. But if I’m wrong, and prices do fall, it will be a great opportunity to buy more gold and gold stocks. I’m not ‘long’ gold for 18 month gains. I’m buying gold for long term inflation protection, and gold stocks for long term capital gains. I won’t liquidate positions due to short term price fluctuations – I’ll use those fluctuations as opportunities to add to my position.

I found a great quote that sums up why I’m long term bullish on gold:

"You have a choice between the natural stability of gold and the honesty and intelligence of the members of government. And with all due respect for those gentlemen, I advise you, as long as the capitalist system lasts, vote for gold." - George Bernard Shaw

Gold, and the companies that can successfully get it out of the ground, are a long term play precisely because there is literally no problem that world governments will not print money to solve.

I’m careful to make the distinction between gold companies, and gold companies that are actually able to get gold out of the ground. Most junior gold companies do not produce any gold. That’s why it’s important to buy the best companies, with solid balance sheets that have proved an ability to actually bring gold to market.

Ian Wyatt, my boss and Chief Investment Strategist here at Wyatt Investment Research, recently put together a report all about a small North American gold miner that’s currently selling for less than $4 a share. They’re already producing gold. Last year they produced over 70,000 grams of gold, and they have over 20 million proven ounces. At today’s prices, that’s $25 billion worth of gold. But they’re only a $200 million company – so as they continue to bring that gold to market, I expect them to soar.

They really are the best junior gold miner in the market today.

Buying this company today is the equivalent of buying their gold reserves for $120 an ounce.

You can read more about this company by clicking here.

Good Investing,

Kevin McElroy

Editor

Resource Prospector