When gold roared to life during the financial crisis, it was both a blessing and a curse. At the time, gold bugs were thrilled that years of sitting on a non-appreciating asset finally paid off in spades. The huge upsurge in gold prices also gave an outlet to many families in need, allowing them to pawn or sell gold jewelry and the like at a time when they were out of work.
People ran to gold because it is a hard asset, and historically has proven to be a safe haven in difficult economic times.
Alas, all parabolic moves end in a stumble. The crisis waned, people moved out of gold back into the stock market, and gold prices fell by almost 50%. Those who bought on the way up have been hurt on the way down, believing that gold would maintain its price. That’s just not how it has traditionally worked.
How to Approach Gold
The standard line from investment managers is to devote a 2% to 3% allocation to commodities and precious metal investments. I’ve never agreed with that approach, because commodities are highly cyclical and aren’t really a buy-and-hold investment.
Gold is really more of a market hedge and a trade, as is platinum and other precious metal investments. If you aren’t prepared to get involved that way, then I suggest avoiding it altogether.
Now, gold has rallied about 15% this year. If one does wish to trade it, or platinum or silver, what’s the best way to do so?
I think gold depends right now on two factors. The first is overall economic sentiment, which is bearish. We had a good run in the market but I think these are bear market rallies that just got exhausted this week. That may mean the market is going to decline again. If so, that is likely to be good for gold prices.
The second factor is technical analysis, which I really only refer to as a windsock rather than a crystal ball. Right now, gold’s price pattern is suggestive of an upside breakout, which, combined with a falling market, could occur.
I think you can enter gold here via the SPDR Gold Shares (NYSEArca: GLD), but set a stop-loss of 7%. If it breaks out over $1,300, it will likely continue upward. I would set trailing stop-losses of 7% to 10%.
What About Platinum and Silver?
Other precious metals are not quite so bullish. Strangely, platinum has not enjoyed gold’s rally, even though it is actually even rarer than gold. Sentiment for platinum seems to be more tied to its actual use in real life, whereas gold has very little pragmatic use. If the economy is sour, then platinum demand sours with it. Not so with gold. So I would avoid platinum.
The same goes for silver, which has gone nowhere but down since its post-financial-crisis peak.
Arguably, we could see some pickup in silver as a hedge or safe haven, and because of its comparatively low price, it may be worth a trade. You could buy the iShares Silver Trust (NYSE: SLV) to take advantage of that play. Or you could diversify by purchasing shares of the Central Fund of Canada (NYSE: CEF), which actually holds both physical gold and silver at about a 2-to-1 ratio.
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