Does Your Portfolio Need A Midas Touch? + Vic Wisemann’s Thoughts on: GLD, FCX, NEM, ABX
 InvestorsObserver Featured Contributor Vic Wisemann |
Gold is respected throughout the world for its value and rich history, which has been interwoven into cultures for thousands of years. Coins containing gold appeared around 800 B.C., and the first pure gold coins were struck during the rein of King Croesus of Lydia about 300 years later. Throughout the centuries, people have continued to hold gold for various reasons.
In November, gold futures posted gains in all but two trading sessions, and they've started December with advances. Meanwhile, holdings for gold exchange-traded funds hit another high.
The U.S. dollar's moves have been big news lately as well, and the long-term trend of the dollar is down. After rising throughout most of 2008 as the credit crisis unfolded and people sought the safety of the dollar, the currency has been on a sustained slide for the past 12 months.
The fact the dollar is down and gold is rocketing up are not totally unrelated. Although the U.S. dollar is one of the world's most important reserve currencies, when the value of the dollar falls against other currencies as it did between 1998 and 2008, this often prompts people to flock to the security of gold, which raises gold prices.
The price of gold nearly tripled between 1998 and 2008, reaching the $1,000-an-ounce milestone in early 2008. The decline in the dollar occurred for a number of reasons, including large budget and trade deficits and a large increase in the money supply.
Read on to see how to put the Midas touch in your portfolio.
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A falling dollar, however, is not the only reason to look at putting gold to work in your portfolio. Increased wealth of emerging market economies has boosted demand for gold. In many of these countries, gold is intertwined into the culture.
India is one of the largest gold-consuming nations in the world, and gold has many uses there, including jewelry. As such, the Indian wedding season in October is traditionally the time of the year that sees the highest global demand for gold. In China, where gold bars are a traditional form of saving, the demand for gold has also shown rapid growth.
Demand for gold has also grown among investors. Many are beginning to see commodities, particularly gold, as an investment class into which funds should be allocated. In fact, the largest gold ETF, StreetTracks Gold Trust (GLD), became one of the largest ETFs in the U.S. and one of the world's largest holders of gold bullion in 2008, only four years after its inception.
The key to diversification is finding investments that are not closely correlated to one another; gold has historically had a negative correlation to stocks and other financial instruments. Recent history bears this out.
The 1970s was great for gold, but terrible for stocks. The 1980s and 1990s were wonderful for stocks, but horrible for gold. As of 2008, this decade has been a good one for gold, and an unfavorable one for stocks.
Gold retains its value not only in times of financial uncertainty, but in times of geopolitical uncertainty. It is often referred to as a crisis commodity, because people flee to its relative safety when world tensions rise.
During such times, it often outperforms other investments. For example, gold prices experienced some of their largest recent movements during periods of tension with Iran and Iraq in 2007 and 2008. Its price often rises the most when confidence in governments is low.
The demand for gold is rising, the value of the dollar is falling and political and economic uncertainty are all combining to drive the price of gold higher nearly every day.
With this set of circumstances you should have part of your portfolio diversified into gold in some form. The question is how to go about it without building a huge vault to hold your gold bars. Despite the space issues you would need armed guards to make sure no one walked off with your shiny coins.
Now, before the gold can be turned into bars, coins or jewelry, someone has to get it out of the ground. The gold miners are another place to get exposure to gold without actually having to own gold.
Freeport McMoRan (FCX) is a megadriller that specializes in copper production but also mines a great deal of gold (the ultra inflation play) and a metal called molybdenum that is used in the production of steel and certain chemicals.
Freeport's stock price has rallied tremendously ever since last fall when the company cut its dividend and copper stood less than $1.50 per pound. Copper spot prices now sit just below $3, while gold has been hitting new nominal highs for the past few weeks.
Newmont Mining (NEM) is the second largest gold producer in the world, and is a very concentrated play on a lower dollar as well as higher inflation expectations going forward.
Barrick Gold Corporation (ABX) primarily engages in the exploration, development, production, and sale of gold worldwide. It also produces copper and silver, holds interests in a platinum group metals development project and a nickel development project and also has interests in oil and gas properties.
From these three you may want to consider ABX with a January 37.50/35 Bull Put Credit spread for a 40 cent credit. The trade generates a 19% return and the stock can fall over 12% and still make its full profit.
Gold should be an important part of a diversified investment portfolio. Its price typically increases in response to events that cause the value of paper investments, such as stocks and bonds, to decline. Although the price of gold can be volatile in the short term, gold has always maintained its value over the long term.
As with all trading in the market, there are risks to consider. Be certain any trade you enter fits into your personal goals and tolerances. Do your research and have some patience and you could make your portfolio golden.
If you have any additional thoughts, ideas or golden opportunities, don't hesitate to e-mail me at vwisemann@InvestorsObserver.com.
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