Gold breaks one way or another. Your opinion determines your stance.
Gold is a conundrum to most investors. Unless you were prescient enough to forecast the huge move to $1,900, you’ve probably either had a little gold as part of your long-term diversified portfolio or tried to trade gold.
There’s merit in the notion that, since precious metals are hard assets, and hard assets tend to retain their value over the very long term, you want to have some long-term exposure to gold … albeit in very small amounts. I suggest no more than 2% of your portfolio should be devoted to gold at any one time, although you may want to double that to 4% in times of economic crisis.
Right now, gold is sitting right at an important support level. If you are thinking of buying gold or gold stocks, you should wait until the metal breaks either higher or lower.
The SPDR Gold Shares (NYSE: GLD) is an ETF designed to eliminate the natural barriers to actually owning gold bullion – accessing it, holding it, and the cost of the transaction itself. The ETF offers ownership interest in a Trust whose only assets are gold bullion, held by HSBC Bank in London, the Bank of England, and the London Bullion Market Association. It holds over 25 million ounces of gold, and there’s even a monthly certificate that proves the holdings were inspected. It doesn’t cost a lot to hold this ETF, as it carries an expense ratio of 0.40%.
If you think gold will break higher, then you buy GLD. If you think it will break lower, you can short GLD.
Central Fund of Canada (NYSE: CEF) is a similar play, but it offers diversity by holding silver as well. Gold and silver tend to move in tandem. The fund holds actual gold and silver bullion in Canadian vaults. Particularly interesting is that the fund trades at a 10.5% discount to net asset value (NAV), meaning you can buy the fund for less than its fair market value.
This may be a telling sign. The last time CEF traded at this much of a discount was in 2002, when the great gold bull market began. Then again, prior to that, gold was moribund for decades. Proceed with caution.
ETFS Physical White Metals Basket Shares (NYSE: WITE) offers physical holdings of the white metals: platinum, palladium, and silver. These metals are also falling in price. The allocation is 53% silver, 26% platinum, and 21% palladium.
WITE generally trades at a slight premium to its net asset value, and that hasn’t changed. It’s currently trading at a 0.6% premium. If you want a bit more diversification in either your long or short trade, go with this selection.
The ETFS Physical Precious Metals Basket (NYSE: GLTR) takes the precious metals concept to the max, giving you access to all four precious metals in one ETF. It holds 1,566 ounces of gold, 46,471 ounces of silver, 390 ounces of platinum, and 779 ounces of palladium. That comes out to 53% gold, 32% silver, 7% palladium and 8% platinum. In this case, you are diversifying your long or short choices as much as possible.
It’s difficult to say where gold is headed next. I am intrigued by the massive NAV discount on CEF. However, with oil prices falling, the economy should improve.
The technicals on gold are very worrisome. My gut feeling is the metal will break lower. Then again, ask me tomorrow and I may feel differently.
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