Gold Bugs Are Running For Cover…

| December 24, 2009 | 0 Comments

Gold has been the talk of the town lately.

Watch any business show and you’ll hear something about it.  Heck, you can’t even watch 10 minutes of TV without hearing some crazy ad urging you send in your old gold jewelry for cash.  (By the way… that’s a horrible idea.)

Gold’s had an extraordinary run in 2009.  Breaking out of a triangle consolidation in mid-August at a price of $950, it ran to over $1,220 recently.  That’s a gain of nearly 30%.

But now the streak appears to have come to an end…

The price of gold has plummeted in the last two weeks, suffering a nearly 12% drop.  Many analysts say the run in gold is over. What’s causing the drop?  Recent strength in the U.S. Dollar is knocking the spots out of precious metals.

Why is the dollar rallying?

There’s a growing fear in Europe.  Greece is stuck between a rock and a hard place.  Prime Minister George Papandreou recently announced a major overhaul of the tax system.

Why would he do such a thing?  The country must generate more revenue.  They’re literally in debt up to their ears.  Some analysts expect the country to see its debt jump to over 100% of GDP.  There’s even an outside chance of the country defaulting on its debt.

These fears are crushing the value of the Euro.  And investors are once again flocking to the U.S. Dollar.  With the dollar soaring, the result is a precipitous drop in gold prices.

So the real question is this…

Is the run in the gold market over?

Not by a long shot.  Yes, we’re in a substantial pullback right now. Continued strength in the dollar could push gold even lower in the short term.  But if you have the appetite for some risk, you’re getting a chance to pick up gold and gold stocks on the cheap.

There’s support in the gold market at the $1,060 level, the highs of mid-October.  If that support fails, then there’s a chance we could test $1,000.

You see, the fundamentals for higher gold prices are very strong. Runaway government spending has many countries diversifying central bank assets into gold.  Fiat currencies are becoming riskier assets (U.S. Dollar notwithstanding).

India already made a big move in October of 2009.  They bought 200 metric tons of gold from the International Monetary Fund (IMF).  This was half of what the IMF had for sale.  An incredibly bullish sign for gold.

Other countries, including China and Russia, have hinted at diversifying their reserves into gold.  Any such move will send prices higher.

So what’s a good way to get in on the gold trade?

You could always buy the streetTracks Gold Trust Shares ETF (GLD) on pullbacks.  This ETF buys and holds physical gold.  As a result, it tracks price changes closely.  If you buy GLD, remember to control risk by using stop loss orders.

You could also establish a position in gold stocks.  One easy way is to buy the Market Vectors Gold Miners ETF (GDX).  We’ve talked about the GDX in past articles.  It’s a great way to get involved without taking excess risk.

Of course, you could always buy individual gold stocks such as Barrick Gold (ABX).  ABX recently released its hedge on the gold market.  This will allow the company’s profit margins to expand with the rise of gold.

Just keep in mind, trading and investing in individual gold stocks can create some risky situations.  You might wake up to find your stock down 25% or more due to news.  I’ve seen it happen before.  And it can certainly happen again.  This is the reason I prefer to trade in GLD and GDX.

Consider adding some GLD or GDX to your portfolio.  Gold prices are eventually moving higher and this is a great way to profit.

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Category: Commodities

About the Author ()

Justin Bennett is the editor of Commodity ETF Alert, an investment advisory focused on profiting from the ebb and flow of important commodities via ETFs. The commodity veteran and options specialist is also a regular contributor to the Dynamic Wealth Report. Every week, Justin shares his thoughts with our readers on a variety of commodity-related topics. Justin is also a frequent contributor to Commodity Trading Research’s free daily e-letter. And he’s the editor of another highly successful and popular investment advisory, the Options Profit Pipeline.

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