Simit Patel

Amongst those of us who agree that the economic downturn in the United States is far from over, the inflation vs. deflation debate is at the center of determining how to preserve wealth and profit in this environment. It is with this in mind that I've focused on this a good bit in my blog on InformedTrades.

Regardless of what side of the inflation vs. deflation debate you fall on, there's one thing almost all of us can agree on: GOLD. Inflationists view gold as a hedge against currency devaluation; deflationists for the most part agree that gold is not as good as legal tender, though expect it to fall less than other assets, and thus still gain purchasing power.

With that in mind, here are my thoughts on creating the ultimate gold portfolio:

1. Physical gold. Yes, I'm referring to accepting delivery, and developing a nice coin collection. To what extent you want your gold portfolio to be in physical gold should be proportionate to how bearish you are. If you are very, very, VERY bearish, I would expect you to want 50%+ of your gold portfolio in physical gold. Personally, I'm looking to get to around 10%.

2. Vault gold. Services like BullionVault and GoldMoney are ways where you can get receipts for gold stored in vaults. Thus it is just like owning physical gold, though the gold is not in your possession; instead a secure vault is holding it for you. These services also make it convenient for you to sell your gold in exchange for legal tender. Moreover, some of these services have vaults overseas, the importance of which I'll get to shortly.

The only question with these services is their trustworthiness.

3. Gold futures. Perhaps the most common way of profiting from gold is is through exchanges like the New York Mercantile Exchange, which will let you speculate on the futures price of gold. While I recommend having gold positions on exchanges, it is worth noting that there have been many, many reports of price suppression via short selling and naked short selling of gold on exchanges. I don't trade futures myself, though if you're looking for futures, you may want to test a demo with InformedTrades sponsor Apex Futures.

4. Gold stocks. Stock traders can purchase gold via exchange traded funds (ETFs); GLD and IAU are two such ETFs. However, reports of price suppression and naked short selling are even more pronounced for the ETFs than they are in the futures market. While a diversified portfolio would probably benefit from having a position in these ETFs, I would consider gold mining stocks to be a better bet. GDX is an ETF traded on AMEX that tracks gold mining stocks.

Other Factors to Consider

Gold bugs everywhere fear the resurrection of something like Executive Order 6012, an order issued in 1933 by President Franklin D. Roosevelt that forbade the hoarding of gold coins, gold bullions, and gold certificates, and required all Americans to hand over such gold products to the Federal Reserve. If such government actions were to return, there might be some security in having gold stored abroad in foreign vaults (as well as in collector coins and in jewelry). Of course, whether or not this is true depends on how exactly the government's response will be enforced.

Click here for a review of products and services I use to profitably trade.

David Waring

Hey Simit,

Insightful commentary as always.

I was doing a little research on the GDX which I was not familiar with before this post. The below chart shows the correlation of the price action in the GLD to the GDX, and it seems that the correlation has broken down somewhat in recent months with the GDX dropping significantly further in the current pullback in Gold. Any thoughts on why that is?

GLD/GDX Price Comparison


By the way if anyone would like to be able to compare prices of different securities as I have done here free with end of day data you can do so by visiting Prorealtime. They have forex, futures, equities not only for the US but also for the global markets.

Best Regards,
Dave

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Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

Simit Patel

Hi Dave,

Very interesting chart, it got me thinking. A hypothesis I'd offer is that the downturn in the stock market is attributed largely to stock positions being unwound to raise cash to make payments; historically in deflationary environments, metals fall less than stocks, so perhaps that is a factor.

Just my educated guess.

jaro g.

folks, don't forget also the most risky (and also most promising :-) 'gold' category = junior gold/silver expoler stocks. they have no gold and no cash flow yet and have big, big difficulties to finance its operations, but in many cases they have promising exploration/mining projects and their current stock prices look like if mr. market would expect their bankruptcy in the next few days (i.e. they are often more than 80% down from their march levels).

but in this category is own research very, very important as there are also many companies they will not succeed .

best luck at stock-picking :-),
j.

__________________
motto: leben und leben lassen ~ to live and let live

my InformedBlog ~ my most often updated site
my blog ~ my beliefs + my development as trader/investor + much more
my website ~ written mostly in german, contains my (not only investment) philosophy + FAQs + private photos + various links + quotations +
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David Waring

Hey Jaro,

Glad to hear from you.

Have you seen anything that would offer an explanation for why the ETF here that tracks gold mining stocks would have dropped so much further than the price of gold when there used to be a much tighter correlation? If no one knows I will do a bit of research on it this weekend as it seems like there would be an opportunity to play the GDX long and Gold short.

Best Regards,
Dave

__________________
My Free Courses: Forex Course - Stock Course - Futures Course - Basics of Trading - Subprime Crisis - Prorealtime Charts

Disclaimer: Trading is risky and can result in substantial financial loss. As always my posts are simply one traders opinion and should not be taken as trading advice. I am not a financial adviser so everyone please do their own analysis and take responsibility for their own trades.

jaro g.

hi dave,

the only explanation i have is the fact, that gold stocks also correlate with general stock market (which was down a lot), probably was their decline therefore more severe than the decline in gold itself ... and for people who consider the gold stocks as leverage to gold price is this behavior not a suprise because leverage works in both directions :-)

btw, i would go long into both, GDX + GOLD :-). well, i know that it would be much more risky than just to trade this spread

good luck,
j.

__________________
motto: leben und leben lassen ~ to live and let live

my InformedBlog ~ my most often updated site
my blog ~ my beliefs + my development as trader/investor + much more
my website ~ written mostly in german, contains my (not only investment) philosophy + FAQs + private photos + various links + quotations +
.

jaro g.

hi folks,

a small enhancement to my previous postings: an interview with john embry of sprott asset management about paper gold, physical gold, production costs, comex, financial crisis, ... (it starts approx. after 9 minutes, before that is there an intersting discussion about canadian oil + gas companies):

Tuesday

happy watching ,
j.

__________________
motto: leben und leben lassen ~ to live and let live

my InformedBlog ~ my most often updated site
my blog ~ my beliefs + my development as trader/investor + much more
my website ~ written mostly in german, contains my (not only investment) philosophy + FAQs + private photos + various links + quotations +
.

Simit Patel

great video, jaro, thanks for sharing. Embry's comments on gold futures traders demanding delivery being a catalyst for the end of price suppression is something I found particularly interesting. It seems pretty logical to me, though I haven't seen anyone else raise that point. Makes me wonder how long suppression can last. Perhaps forever?

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jaro g.

hi simit,

for a fully invested gold bug like me looks this current gold price suppression [in the epicentre of paper money crisis!!!] like a never ending nightmare, but there must be a day when i will wake up and the manipulation is over :O

well, till then i have to ask myself: do i have enough gold + SILVER already?

greetings from munich :-),
j.

__________________
motto: leben und leben lassen ~ to live and let live

my InformedBlog ~ my most often updated site
my blog ~ my beliefs + my development as trader/investor + much more
my website ~ written mostly in german, contains my (not only investment) philosophy + FAQs + private photos + various links + quotations +
.

jaro g.

hi dave,

mogambo guru @ daily reckoning provides the idea for another sooooo secure spread-trade (gold vs. silver): ... He also notes that the gold/silver ratio is at more than 80, which is "one of the biggest differences in history." ...

btw, i would again trade on the long side both, gold and silver! well, i would probably wait with my entry till gold falls bellow $700 (hmmm, 680? 650?) or usd loses its latest strength against eur or both

p.s. the whole funny and as always not too academic article: A Bull in a Silver Shop

__________________
motto: leben und leben lassen ~ to live and let live

my InformedBlog ~ my most often updated site
my blog ~ my beliefs + my development as trader/investor + much more
my website ~ written mostly in german, contains my (not only investment) philosophy + FAQs + private photos + various links + quotations +
.