Everyone from individual investors to central banks are snapping up gold hand over fist. And $2,000 may just be a rest stop before the real parabolic move higher.
Denial Is Not Just a River in Egypt
Now this bullish claim is not new coming from me. I’ve been saying this for well over 8 years and battling it out with gold bears on TV and radio, at seminars around the world, in print, and elsewhere, since gold was trading around $450.
The same arguments I have heard over the last 10 years against buying gold, I’m still hearing today. The denial is really sad! You can hardly blame some of these analysts and economists though. Even the chairman of the Federal Reserve, Ben Bernanke, when asked by Senator Ron Paul if he thought gold is money, Mr. Bernanke basically said “No.”
Now with gold close to hitting the $2,000 mark, wouldn’t it be nice to go back in time and be able to buy it at $1,200? Sure, it would! But I think that in a few years when gold is at $4,000, people will be saying the same thing about $2,000. The fact is that adjusted for inflation we need to see gold at about $2,200.
Back to Bullion
Let’s face it, nothing has changed on the fundamental front for the U.S. dollar. And the global economy is actually more in tatters now than it was when gold moved from $450 to $1,900, and I expect things to get worse.
We still have high unemployment, near-zero interest rates, endless printing of fiat currency by the Fed, and a debt-to-GDP ratio that is mind boggling! Now add in what looks to be the disintegration of the euro, and possibly the end of the entire European Union, and you have all of the elements in place to see gold prices really explode to the upside.
But in my opinion, one factor stands head and shoulders above the rest, and that’s central bank buying.
European central banks have once again become net buyers of gold for the first time in more than twenty years, which is a very clear indicator of how uncertain things are in the currency and debt markets right now.
Countries such as Mexico, Russia, South Korea, and Thailand have made sizable purchases this year. The reason is clear why these countries are taking this action: They want to reduce their exposure to the dollar. Worldwide, central banks are set to buy more gold this year than at any time since the collapse of the Bretton Woods system four decades ago, which by the way was the last time the value of the dollar was linked to gold.
So far, on a relative basis, the purchases by central banks are small when compared to the size of the global gold market overall. That in turn, is very bullish to me. This level of buying is a complete U-turn for most of these central banks, especially in Europe, who sold gold heavily.
Even the small increase we have seen in central bank buying has helped lift the price of gold by more than 25 percent so far this year, hitting a high of $1,900 on 9/5/11.
For years I’ve been encouraging people to have gold in their portfolios.
Will there be corrections in gold, certainly. Volatility in gold (NYSE:GLD), and silver (NYSE:SLV) for that matter, remains very, very high. The exchanges have tried repeatedly to raise margins in an effort to slow buying, but it’s been about as effective as butter stopping a hot knife.
So is it too late to get in on the gold rush? Not at all!
There are many good ways to invest in gold, including: Gold coins, bullion, key mining shares, and options on futures. Diversification and risk management are key. One of my favorite vehicles for investing in gold is key gold ETFs.
And one that I really like is Market Vectors Gold Miners ETF (NYSE:GDX).
I also like the SPDR Gold Trust ETF (NYSE:GLD). And while I like the GDX and GLD ETFs, I like trading options on them even more! Buying options on ETFs provides greater leverage and one big bonus, limited risk.
In fact my Master Trader readers grabbed 54.2 percent profits on the first half of a January GLD option position in just 12 days and then another 196.7 percent in just 17 days, for a combined profit of 125.5 percent in just 17 days.
Now Master Trader readers have a new GDX option position to benefit from the next leg up in gold, which I expect by year’s end. I can’t tell you what the specific trade is, but would love to have you join us so I can!
Bottom line is that gold has had an incredible run higher over the last few years. But that could simply be a dress rehearsal for the real show that’s about to begin. As central banks and individuals shift out of fiat currency, one of the few safe harbors is gold. It’s that simple.
So don’t be intimidated by the gold bear; take action and hedge your portfolio against the falling dollar and euro using limited risk strategies like I have discussed.
Related ETFs: SPDR Gold ETF (NYSE:GLD), Market Vectors Gold Miners ETF (NYSE:GDX), Market Vectors Junior Gold Miners ETF (NYSE:GDXJ), iShares COMEX Gold Trust (NYSE:IAU), PowerShares DB Gold Double Short ETN (NYSE:DZZ).
Yours for resource profits,
Money and Markets (MaM)is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaMare based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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