Market Overview

Au 1640: Is Gold Getting Lackluster?

In light of the recent decline of the precious metal, is gold becoming a lackluster investment?

MarketWatch's Claudia Assis had an article from Jan. 13, 2012 on "why gold could lose its glitter in 2012". Assis: "Investors who have recently jumped on the gold bandwagon will need plenty of patience this year, as the anemic global economy and better prospects for the US dollar combine to dim gold's allure."

Whereas gold will probably rise in 2012 for the 12th year in a row, Assis commented that "any advance is expected to be more modest than in recent years." According to Jay Feuerstein, chief investment officer of 2100 Xenon Group, a firm based out of Chicago that deals with commodity futures, "short-term gold speculators are likely to have a tougher time with the metal this year."

According to Assis' analysis of gold's prospects in 2012, "the absence of catalysts to drive buyers to gold is affecting both demand and price." Owing to the fact that there have been no signs of further quantitative easing by the Federal Reserve anytime soon and as the Eurozone struggles with a serious debt crisis, gold appears to be linked to movement in the US dollar. Assis commented that "the dollar is seen as firming this year as the US economy shows strength to other developed nations."

That being the case, there is still room for gold in a balanced portfolio. Feuerstein noted that "gold is a hedge against inflation and currency fluctuations" while recommending that investors limit gold to no more than 5 percent of one's portfolio. As for where gold will finish in 2012, "Feuerstein sees gold ending 2012 not much beyond $1,700 an ounce." In comparison, Michael Widmer of Bank of America Merrill Lynch "sees gold approaching $2,000 by year-end." Gold is currently trading at $1,640 per ounce.

Assis noted that gold may be an advantageous way to offset currency risk, to guard against "global economic uncertainty", or to protect against a "black swan" type event (we are living in the year 2012 after all) that would throw the global economy into tumult. Assis concluded her analysis in that gold miners have underperformed in comparison to gold. Even so, "investors might want to give the miners another chance" owing to the possibility of dividends, growth prospects, and better management in various mining companies. In pertinent part, Assis mentioned Newmont Mining Corp. (NYSE: NEM), Eldorado Gold Corp. (NYSE: EGO), Agnico-Eagle Mines Ltd. (NYSE: AEM), and Osisko Mining Corp. (TSE:OSK) as being possible investment opportunities.

In terms of investing in gold via mining companies, readers may remember my recent discussion on Republican presidential candidate Rep. Ron Paul's investment strategy. Far from what a financial planner may consider a balanced portfolio, 64 percent of Paul's assets are in gold and silver mining stocks with no disclosed holdings of physical gold, gold coins, or gold ETFs.

On the topic of gold's place in a balanced portfolio, Mad Money's Jim Cramer has gone so far as to place gold as one of the five key areas for his "new diversification" method of investing. Reporting on Cramer's perspective on diversification, CNBC's Drew Sandholm wrote in August 2011, "For maximum protection and maximum upside, investors need to be in these five areas: gold, a dividend-paying stock with a high-yield, a growth stock, a speculative play and something foreign." For Cramer, gold can be likened to "an insurance policy against economic or geopolitical chaos, uncertainty and inflation."

As for whether traders and investors should buy gold mining stocks, physical gold, or ETFs, Cramer has said that "buying bullion only makes sense of investors, who can afford to buy in bulk and pay for the bricks to be stored in a depository bank." As for gold miners, Cramer has previously recommended Agnico-Eagle (NYSE: AEM) and Eldorado Gold Corp. (NYSE: EGO). Cramer: "To make sure your portfolio works in any kind of market, you need to own some gold as insurance." Even recently, Cramer has written for TheStreet.com that investors should not give up on gold.

Far from Feuerstein's recommended limit of 5 percent, during the Mad Mail segment on the Jan. 13, 2012 episode of Mad Money, when asked how much gold one should keep in his portfolio, Cramer responded that a good benchmark would be between 10 and 20 percent. Cramer: "I don't regard gold as a stock. I regard it as a currency. It's an alternative currency to the fiat currency, the printed currency, that we have in the United States and they have in Europe." Cramer added, "I trust gold; I don't trust paper."

While gold may be losing its glitter, what about other precious metals? Platinum is currently trading at $1,493 per ounce. Ah yes, I can remember the good ol' days when platinum was more expensive than gold. While platinum went as high as $2,200 per ounce in early 2008, it would appear that the metal bubbled out in late 2008 falling to near $800 per ounce while scraping back to near $1,000 per ounce in early 2009.

While we are on the topic of precious metals, we cannot forget about silver. Silver is currently trading near $30 per ounce. It's hard to believe that silver was at around $5 per ounce in 2000. Heck, in 2008 the metal fell from $20 per ounce to $10 per ounce. While gold historically has been the prime precious metal of the international market, investors cannot forget about silver.

It could just be me, but where gold may be perceived as more valuable than silver, silver (at least to me) seems to be the much more practical precious metal for everyday traders and investors. The idea of a mere handful of coins being worth $5,000 to $10,000 can be quite daunting. This is not to say, "Leave all the gold to the banks and kings", but in terms of practical value given practical storage, there is something to be said for silver's utility and relative ease for transactions.

To illustrate the differentiation of gold and silver in terms of practical use, historically gold was used for expensive purchases, expensive trading, and bulk transactions, i.e. financial transactions of the wealthy. Everyday transactions for common people were in copper and silver coins. This is part of the reason why the UK's currency is known as the "pound sterling" and not the "pound gold".

Even further, the historical gold to silver ratio was 12 to 1, that is to say, 12 one-ounce coins of silver would be equal to one one-ounce gold coin. Were this historical ratio instituted today, from gold's price an ounce of silver would be worth roughly $136.83 today; from silver's price one ounce of gold would be worth roughly $360 per ounce. In light of this historical perspective, it would appear that silver has substantial room to rally in the years to come. Thus, even if gold is losing its luster in the short-term, silver may inherit some of that lost glitter. And given the possibility of political uncertainty and geopolitical tumult, in terms of everyday utility, silver may become the more practical investment for the everyday investor. Indeed, all that glitters is not gold.

ACTION ITEMS:

Bullish:
Traders who believe that gold will retain its glitter in 2012 might want to consider the following trades:
  • Go long on SPDR Gold Trust ETF (NYSE: GLD) and iShares Gold Trust ETF (NYSE: IAU).
  • Traders could also check out purchasing physical gold in bars and coins.
  • Traders looking to take advantage of growth from gold via mining stocks can check out Newmont Mining Corp. (NYSE: NEM), Eldorado Gold Corp. (NYSE: EGO), Agnico-Eagle Mines Ltd. (NYSE: AEM), and Osisko Mining Corp. (TSE:OSK)
Bearish:
Traders who believe that gold is losing its glitter and still want to invest in precious metals may consider alternate positions:
  • Short the above, and check out iShares Silver Trust ETF (NYSE: SLV) and physical silver in coins and bars.
  • Traders could also check out ETFS Physical Platinum Shares (NYSE: PPLT) and ETFS Physical Palladium Shares (NYSE: PALL).
Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.

Posted-In: CNBC Long Ideas Jim Cramer Specialty ETFs Commodities Currency ETFs Economics Markets Best of Benzinga

 

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