Tags: gold | ETF | stocks | currency war

Currency Wars Lead to Gold (Stocks)

Wednesday, 13 Feb 2013 07:39 AM

By Ashish Advani

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I will be the first one to concede that I am not a stock jockey. My gig is currencies and international investing. Yet today I am compelled to write to you about a stock idea.

I have written to you in the past months that we are headed for a full-blown currency war. It is the race to the bottom as to whose currency is the ugliest. For a while, I was convinced that the U.S. dollar would win that contest. I underestimated the conviction of Japanese Prime Minister Shinzo Abe, who openly declared that he wanted to devalue the yen.

I was under the impression that the markets are deeper than the government and would fight him. What I did not take into account was that the market (read hungry bank traders) needed fresh blood to make money. So they took the cue from the Japanese momentum and have really crashed the yen, making billions in the process.

We all know the fiat currency experiment is turning over now. All currencies are struggling and each country is heavily manipulating its own currency to its gain. So while I will not shy away from a currency trade, I would be wary of all currencies today.

So where does one put their money? In such times we have seen investments in hard assets such as real estate and gold.

Guess what? Real estate is still a bust in the United States and gold, as an asset class, is heavily manipulated. I cannot trust gold completely either. So I suggest the next best alternative.

As a group, gold stocks are down between 20 percent and 30 percent over the past year. Yet in that same timeframe, the price of physical gold has risen.

The possible reasons for this anomaly could be exchange-traded funds (ETFs), such as the SPDR Gold Shares ETF (GLD) and others, give investors a reason to buy the ETF instead of gold stocks. Another reason could be investors’ perception that the cost of gold extraction is higher now, meaning lower profits for gold companies.

While the last reason may have some credibility, we have to balance the series of reasoning with the enormous expansion of the money supply in the markets. Central banks have created trillions of dollars out of thin air. And global debts have merely migrated from the private sector to public balance sheets.

Granted that money has gone into ETFs, with gold stocks now relatively cheaper against gold itself, a reversion to the mean seems a reasonable expectation.

I'm not suggesting this trade for the long term. All I'm suggesting is that there's money to be made buying a hated sector of the stock market while it's out of fashion and nobody wants it.

Right now, this means gold stocks. More than likely, sentiment will rebound, the crowd will come back and we'll be able to lock in short-term profits.

I am looking at some relatively large cap gold company stocks now and suggest you consider this idea for a short-term trade.

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