The gold debate heats up
Today's Financial News - Posted December 15, 2008
Gold investors are bidding up the value of the precious metal. As the dollar shows weakness and interest rates drop, gold’s demand is on the rise. The question is, how long will bulls remain in charge? The bears are already sharpening their claws.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): The old saying that cash is king is not as true as it used to be. With so many investors fleeing the turbulent markets, billions of dollars in cash are sitting on the sidelines, with investors looking to stash their stockpiles in any safe place they can find.
The American government has been the go-to repository. As the safest of them all, Treasury bonds are seeing huge demand. But with demand comes increased prices, and with increased prices comes dwindling interest rates.
The privilege of loaning your cash to Uncle Sam is no longer a profitable one. Give the government a few thousand bucks for the next few years and it will hand you a couple of nickels to rub together. As the value of the dollar declines because of these low interest rates, the situation only promises to get worse.
That is why hordes of investors are turning away from the bond market and once again tossing some money into the gold market. Gold prices made significant moves last week and are on the rise once again this week. As I write, gold is trading for close to $830. That means the precious metal has tacked on roughly $100 since its November lows.
Hurricanes are tough to predict
If you want to know which way gold prices are headed, it depends on who you ask. Some analysts say, $1,000, $1,500 or even $2,000 an ounce is just around the corner. Others say the fundamental value in gold is waning fast and bearish investors should watch for $600 or even $500 per ounce.
As the world’s economy strengthens, the bears will be right. But in the meantime, the declining dollar, the high-risk equities market and fears of government supported inflation are going to propel gold’s prices dramatically higher.
There are multiple ways to take advantage of the price hikes. The simplest would be to buy a gold-based ETF like SPDR Gold Shares (NYSE:GLD). But if you want to magnify the potential gains, use the leverage created by investing in a gold miners like Goldcorp (NYSE:GG) or Barrick Gold (NYSE:ABX). Their current valuations look quite cheap if gold starts to soar.
But with so much uncertainty in the economy and the government ready to re-write the economic textbooks, investors must be aware of the increasing risks. In an ill-informed attempt to “jolt” the American economy back into high gear, the government could easily force gold prices off their track and into a canyon of deep declines.
Smart investors will hedge against any serious unexpected price fluctuations. I recently wrote about a great hedging technique using options based on the gold ETF mentioned above. It has already started to pay off.
Over the next week or so, I plan on taking a much deeper look at the issue and comparing the precious metal to other investments. For example, what is a better place for your cash, a pile of gold or a stack of Johnson and Johnson (NYSE:JNJ) shares? Or how about gold versus real estate?
The comparisons will be interesting. But most importantly, they will help ensure your money is working for you in the best way possible.
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