- Created on Friday, 13 August 2010 16:46
- Written by Jared Levy, Editor, Smart Investing Daily
- Hits: 3358
The second week of August is proving to be a volatile one for the equity markets. After the Federal Reserve's extremely unexciting intention to begin using the proceeds from maturing mortgage bonds acquired during the crisis to maintain its holdings of domestic securities around $2 trillion, the financial markets didn't seem to react positively. That action was more of a prevention of monetary tightening versus true monetary easing, which many economists and traders still believe the economy needs. When you couple this lack of action with Wednesday's worse-than-expected trade balance number and a slowdown in Chinese factory production, you had a recipe for disaster! Of course to top it all off, weekly jobless claims jumped to 484,000, not good...
The S&P 500 (SPY, SPX) index violated some key short-term bullish indicators this week, which is one of the reasons we saw that sharp drop on Wednesday, which in turn pushed the index into negative territory for the year.
The financial market remains in a fairly bearish long-term trend being that the 200-day simple moving average (currently about 1,115) is still above the current price of the index. That same moving average will be upside resistance for the broad market and a level we must break out of if we are going to see a change in trend.
Many of your brokerage accounts have been taking a beating and if you just chicken out (like we all do sometimes) and put your money in the bank, you'll be lucky to get 1%, which is actually costing you money when you consider the average inflation rate of 3%+ over the past 10 years.
So How Does Gold Play Into All This?
I read a Wall Street Journal/NBC News poll that showed almost two-thirds of Americans still believe the economy is on a downward slope and has not yet to reach a bottom; these new results are much higher than the 53% of Americans who felt that way in January. The sentiment of not only Americans, but much of the globe, is continuing to move south. Those emotions alone are enough to bring out the gold bug in all of us, not to mention that in the longer term, inflationary pressures from all the money created for bailouts around the world will drive the oldest global currency higher.
If you look at a chart of gold, it has been above its 200-day simple moving average for over a year, unlike the S&P 500, which fell below that level in early May. This is a very bullish technical sign for gold and is one of the most common indicators that professional traders use to spot trends. Gold also tends to be negatively correlated to the markets, so if the market is dropping gold is usually going the other way. (This doesn't mean that they both can't move in tandem; don't forget that gold moves opposite the U.S. dollar and the equity market has been moving this way as well.)
The end of the year (specifically September, historically) generally bodes well for gold for several reasons, including the end of the holy month of Ramadan in Muslim countries such as the United Arab Emirates and others. In India, Dhanteras, the festival of lights, which occurs in November, is the world's largest gold market, driving more demand. Hindus consider it auspicious to purchase gold or silver articles during this time or at least one or two new utensils. China, the world's second-largest gold consumer, also tends to see a rise in the months following the National Day on Oct. 1 to the Chinese New Year in early February.
Last year I recommended gold on CNBC at the beginning of September for similar reasons and chart patterns. Gold went from $975 to over $1,200 - over 23% in a couple months.
A Very Efficient Way to Buy Gold and Hold It in Your Brokerage Account...
Of course, if you wanted to buy gold, there are numerous websites and outlets out there (eBay included) through which you can purchase gold typically for a fee or markup. When you buy gold itself, you are paying a premium as a regular consumer. For example, if you want to buy some real gold on eBay, you might pay $1,325.00 (shipping included) for 1 ounce of gold.
Spot Gold is currently trading for about $1,214.00 per ounce. This means that you would be paying a $111 premium or 9% over per ounce. Not to mention you would have to figure out a way to sell it if your gold appreciates, which could cost you money and time.
Buying gold futures and options are certainly ways to get long gold (I promise I'll teach you those methods as well), but for those of us who are maybe not comfortable with those markets or if you have more of a long-term view and want liquidity, there is the SPDR Gold Trust ETF (GLD:NYSE).
You can buy and sell GLD just like a stock, only when you buy GLD, you are actually buying gold. The GLD is set up as a trust and actually buys, sells and holds gold bullion. The trust actually holds over 1,310 tonnes of gold (valued at over $52 billion in assets), which means it owns more gold than many central banks; the entire country of France owns about 2,450 tonnes.
This translates to the GLD tracking the price of gold very closely on a percentage basis, but what's better is that the GLD only costs one-tenth the price of actual gold, so you don't have to lay out as much cash!
There is a small fee associated with owning the GLD, about 0.5% annually, plus any commissions your broker charges to buy or sell the GLD itself. For the liquidity, flexibility and ability to own gold for one-tenth the price, I think it's well worth it!
Other Ways You Can Invest in Gold
The precious metal takes many forms and there are many ways to invest in it aside from trying to barter for gold bars on eBay or buying shares of the GLD ETF.
Gold Coins - Numismatics or coin collectors not only buy rare or collectable coins for their underlying weight in a precious metal, but the design and history of a rare or limited-production coin can warrant premiums far beyond its weight in gold.
If you are looking for rare coinage, First Federal Coin Corp. is currently offering a 99.9% pure, extremely unique China gold proof available in extremely limited quantity. And when I say "limited quantity," I mean just that... only a few hundred remain and they are selling out quickly. So if gold coins interest you, you need to act fact. Now, I do need to tell you that Taipan Publishing Group has an advertising relationship with First Federal, and we could profit from any sales. But with that said, I do think this is a gold investment strategy you should investigate for your portfolio.
Gold Miners -Gold mining stocks also can offer you an alternative to buying the shiny yellow metal itself; companies like Goldcorp (GG:NYSE), Barrick Gold Corp. (ABX:NYSE), Newmont Mining Corp. (NEM:NYSE), Kinross Gold Corp. (KGC:NYSE) and Agnico-Eagle Mines Ltd. (AEM:NYSE) all tend to track the price of gold along with the added volatility of being regular companies themselves. These companies are susceptible to risks above and beyond changes in the price of gold, so be cautious investing directly in these issues without doing your homework. To mitigate some of the risk associated with buying an individual gold mining stock, check out GDX, which is a gold mining ETF offered by Van Eck.
Get to Know Jared Levy
Smart Investing Daily's Jared Levy appeared on CNBC's Fast Money Midday Market Check this past Monday. He and the other commentators discussed overall market trends and the reprieve for RIMM, HP shedding more shares, and winners and losers in HP's post-Hurd era. View CNBC's Fast Money Midday Market Check here.
Jared is scheduled to appear again on CNBC's Fast Money Halftime Report this Monday, August 16th, at 12:30 pm eastern time. Be sure to check it out.
Jared Levy has a passion for teaching the public how to successfully and consistently invest, while keeping risk low. Now as co-editor of Smart Investing Daily, he can help you do that too. If you'd like to learn more about Jared Levy, you can do so here.
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