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