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Are Diversity and Quality the Way to Profit from the Rebound in Gold and Coal?

December 26, 2013 2:53 pm
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Based on the economic characteristics of each, the exchange traded funds for gold, SPDR Gold Shares (NYSE: GLD), and coal, Market Vectors Coal (NYSE: KOL), should have an inverse trading relationship. That means that each should go the opposite way of the other in price action. The reason for that is coal rises when economies are strong, as there is a greater demand for the fossil fuel to heat and power factories, farms, homes, and other needs. By contrast, gold performs best when economies are weak, as it is favored over paper money that is considered to be losing value.

For 2013, however, both gold and silver had a terrible year.

The S&P’s 500 Index (NYSE: SPY) is up more than 25 percent for the year. Both Market Vectors Coal and SPDR Gold Shares have fallen more: much, much more. Stocks of a high quality in the sector of each, such as Peabody Energy (NYSE: BTU) and Yamana Gold (NYSE: AUY), have also plunged. There is little in the short term to expect a rebound for the prices of securities in the gold and coal sectors.

But neither the gold nor the coal industry is going out of business.

Related: Another Lump of Coal for the Sector…How to Invest?

There is certainly plenty of support for investing in the sectors of each. Emerging market economies are growing, and these have a tremendous demand for gold and coal, especially China and India. For the investors, it becomes a matter of just how to proceed to profit from the rebound. Focusing on diversity and quality should be the best way to invest for the long term in gold and coal securities.

Diversity comes from the exchange-traded fund for each sector.

Market Vectors Coal and SPDR Gold Shares provide diversity for investors. That is from each exchange-traded fund owning a broad range of industry securities. This downside protection from that asset base diversity is a very appealing feature of exchange-traded funds as a class of financial instruments.

As for quality, Peabody Energy and Yamana Gold are considered to be among the best each sector.

Now trading around $18.50 a share, Peabody Energy was upgraded in mid-October by BMO Capital Markets with a target price of $23.00. BMO Capital Markets set a target price of $13 for Yamana Gold back in July: it is now trading for about $8.50. Each pays a dividend to reward investors for waiting for the rebound in gold and coal stocks.

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