Gold vs. Silver. Bullion vs. Equities. What's the Trade?

The fundamentals behind the precious metals rally, specifically gold and silver, are very different. Let's take a closer look.

Gold

• The rally, like equities, has been driven greatly by the liquidity wave created by the Federal Reserve's fiscal policies. These easy money policies have led many investors to structure their trades around the saying "Don't fight the Fed". By realizing and accepting the fact that as long as the USD continues to face downward pressure, gold prices will rise, traders have been successful.
• The idea of Gold as an alternative currency has been gaining further popularity due to current economic, political, and environmental situations, which I will discuss in my next post.

Silver

• The rally in silver has been driven by speculation and therefore lacks the fundamentals behind such a strong movement.
• Silver has been appreciating at a much faster pace than gold, but relies almost entirely on market sentiment, and poses a risk of quicker depreciation as well.

Here are some things to remember:

• Buy in on pullbacks, they will occur, and rallies do not last forever. Be patient.
• Always have an exit strategy. This is a trade, not an investment. Lock in profits at technical levels of resistance.

General Strategies:

• Buy into Gold Bullion
• Buy into Gold Equities
• ABX
• EGO
• NXG
• Buy into Silver Bullion

• Josh Brown's trade for Gold and Silver (VP Investment Fusion Analytics)
• Ivanhoe Mines Ltd. (IVN)

• Originally a gold and copper mine in Mongolia that recently announced they will begin mining three million oz of silver daily over the next decade.
•  A joint venture with the Mongolian government

QUESTION: Do you play the equities or the bullion?

Fears of Contagion Push Gold Prices to an All Time High

The problem here isn't whether or not the global oil market can weather the Libyan protest, but rather the fear of such a movement reaching Saudi Arabia, the #1 global oil producer in the world. Although Libyan crude oil is highly attractive due to its low sulfur content and relative location in relation to the earth’s surface (making it easily accessible), the country simply does not produce enough at the moment to pose a major threat to the global oil supply.

The true problem lies in the Islamic belief of "One direction, one people, one god". This fundamental belief has many fearing that it is only a matter of time before the current wave of social unrest hits Saudi Arabia. With other Islamic countries already in the mix, such as Algeria, Libya, Tunisia, Iran, Yemen and Bahrain, what's there to prevent such a fear from quickly becoming a reality?

From an investor’s point of view, such anticipated chaos would inevitably drive oil prices to $200 a barrel. This not so far-fetched future reality has pushed the price of gold to an all time high of $1,440.31, which clearly shows a pricing in of contagion regarding political, social, and military unrest.

  

If commodity prices continue to rise, Bernanke would be forced to extend QE2 beyond the expected June 2011 completion date in order to control price instability and U.S economic growth. Without further monetary policy, the United States would most likely experience another recession due to a decrease in per capita discretionary income.

As an investor in gold, taking a long position, this is profitable news. The stars have aligned.

1. Global political and social unrest
2. North African and Middle Eastern contagion
3. A rise in global oil prices due to fear of a shortage in supply
4. More Quantitative Easing and federal intervention
5. Further devaluation of the US dollar

My recommendation on February 20th was to buy on the pullback, which would have certainly been profitable; however it is not too late. Gold prices will continue to rise.

Recommendation: BUY

Inverse Relationship: Price of Gold & United States Dollar

The invest relationship between the price of gold and the USD has never been more evident than now!

Despite turmoil in the Middle East, contagion in the Euro Zone financial system and an increase in the price of oil, the U.S. dollar has still managed to fall in value. It has become of game of investor sentiment rather than conventional fundamental analysis. Investors no longer categorize the USD as a safe haven currency, especially with the inevitable U.S. inflationary measures that will certainly take place over the next 5 years.

However, gold has managed to increase $28 in the past two weeks during this time of global turmoil, increases in commodity prices, and QE speculation. Prices are rising rapidly, but demand has never been higher.

Unless Bernanke can provide a clear and concise explanation regarding deficit reduction without the use of an inflationary strategy (which I believe is impossible), gold with continue to rise.  

Boo-yah to Cramer. For once, this guy was right.

Fact: Every $10 increase in the price of a barrel of oil causes on average a .5% decrease in U.S. GDP growth

Preserving the Purchasing Power of Accumulated Wealth

At this point, gold seems to be a far more lucrative investment than simply preserving purchasing power. (1)Simple economics of monetary policy along with (2) technical analysis and my favorite indicator of all, (3) the "Magazine Cover indicator" all indicate a continuation in the 11 year bull market.

#1 To maintain (in the short term) and eventually make ground (long term) towards reducing the US fiscal deficit, inflation is absolutely necessary. During this time of "inflate to survive" U.S. monetary policy, the USD will certainly face downward pressure in the FOREX market. In order to prevent deflation and/or an entire budget collapse, the U.S. Federal Bank will essentially ensure future long position profitability for gold.

#2 Like silver, gold seems primed and ready to break through the resistance levels of a near term third peak in a triple top. (Graph Below)

#3 The recent magazine cover story titled "The Power of Gold" at first glance clearly seems to be a bearish signal according to Paul McRae Montgomery (Legg Mason).

According to Mr. Montgomery, "The great value of popular magazine covers is they indicate the extent to which awareness of fundamental factors is widely shared, and therefore are unable to move prices significantly further".

However, the bearish tone of the article, according to Montgomery's theory is a bullish indicator for gold when applying his theory inversely.

What is the 52 week price point for gold?

Was Cramer correct with his prediction of $2000?

Buying the Pullback as ETF's Pullout

Increasing large outflows from commodity ETF's have opened up yet another opportunity to buy into a gold pullback at an attractive price.

The 11 year Bull market has made simple trading strategies most effective. Adding to a gold position at every possible pullback in the last 11 years would have been the correct trade 100% of the time, why stop now?

Last month, the 10 day MA of the second largest gold ETF, iShares Gold Trust (IAU), fell below the 50 day MA (see above) due to the ETF outflows. However, the recent rally in gold, due to a U.S. currency devaluation, is showing a strong push that will eventually bring the 10 day back above the 50. If you are still skeptical wait for the indication, then buy, and watch as history repeats itself. $$$

Mubarak Takes Gold Down With Him

Gold April futures dropped $2.10 (.02%) to $1,360.40 an ounce on the Comex division of the New York Mercantile Exchange after Egyptian President Hosni Mubarak announced his official resignation.

Now that the Egyptian riots have ceased and the protestors find themselves back at work (or soon to be) uncertainty in the global markets originating in Cairo no longer requires a financial hedge.

Once again, investors are no longer scared in the short term and therefore drop their gold positions as if the metal has not been on a 10 year bull rally. Volume from traders has been significantly lower post-resignation and therefore liquidity in the gold comex market no longer is attracting market making players.

However, uncertainly, like New England weather, can and will change very quickly...just wait until tomorrow's opening bell. The Egyptian political scene is far from stable. This movement away from gold seems a bit premature for what is the first of many rounds of reorganization in Cairo.

What will be the next story traders use to advocate a move back towards gold?

Bernanke: No Inflation Risk

Fed Chief Ben Bernanke confirms that Federal intervention in the bond market is still an active and necessary strategy to move towards a full employment level. The take away from today’s Q&A with the House Budget Committee also gives traders no incentive to buy into the down gold market.

Although buying into a pullback is a fundamental strategy of trading, if Ben says that there will not be any near term inflation, then there won't be. Without inflation or even an inflation scare, gold prices have no reason to trend upward. People are not scared and gold is most useful as a hedge against lost investor confidence. 

The Fed's aggressive QE2 strategic buyback of $600 billion in bonds through the first 2 quarters of 2011 promoted economic growth but no need to invest in gold until the training wheels are taken off.

Chinese One Step Ahead...Again

 This weeks gold price gaped up on the fourth trading day due to speculation that the Chinese Fed and Central bank plan to stockpile rare-earth metals.

Such a strategy will work to hedge against volatile global rare-earth metal prices. This strategy will not only limit Chinese exposure in price movements, but will certainly add to what already is a dominant 90% control of total global rare-earth supply.

If this isn't a bearish signal for currencies and equities, I don't know what is.

Is this signal strong enough to hop on the gold bandwagon, again?

Cramer: Investing in Gold a Win-WIn

"I create nothing, I own."

Now, I understand that Gordon wasn't referring to gold when making these claims, however, they can absolutely be applied to this "gold mine" of an investment.

There is no need to invent carelessly organized and difficult to understand trading strategies when unimaginable amounts of profits can be found in this precious yellow, highly malleable, ductile, and not subject to oxidation or corrosion metallic element.

DO NOT CREATE...JUST OWN