It’s time to catch up on our gold trade. I hope you’ve come along for the ride. If not, don’t worry, I think there’s going to be a lot more fun and games to come with gold.
In fact, I’m a bit surprised that gold hasn’t already blasted through its previous highs.
Today I want to put forward my theory as to why that is. And I’ll look at two great ways that we can profit from the rise in gold. Because by my reckoning it’s only a matter of time before we see another break upwards for old yella.
A reminder on how to play the gold bull
The way to play a secular bull market is to keep buying all the way up. I know it can sound a little perverse. Paying more and more for your exposure feels kind of contrary. But that’s the way to play it.
The most renowned trader of all time, Jesse Livermore, taught us this trick a long time ago. And it’s a great way to play what I think is still a strong bull market in gold.
When I started writing The Right Side, just over a year ago, gold had already started its run. But still I gave you my strategy – buy every time gold moves up $100. We bought at $1,230, then $1,330, again at $1,430 and more recently at $1,530.
The strategy is working perfectly. And in my opinion there’s a lot more mileage in it. Gold has been consolidating around the $1,500 mark for quite a while now. I have to confess I thought we’d already be a lot higher.
But you can’t hurry this trade. Softly, softly, catchee monkey.
Why gold is treading water
If you look in the right places you’ll find plenty of investors bullish on gold. But if you ask an average investor whether they’ve got exposure, you’ll usually find they haven’t. And there’s a good reason for that.
The average investor hasn’t got a clue about the potentially dire financial crisis at hand.
I’m reminded of a comment from Merryn Somerset Webb during a TV debate on house prices. “House prices haven’t crashed yet – so they won’t” stated a housing expert. “Well…” came Merryn’s riposte, “You haven’t died yet. Does that mean you’re less likely to die next week?”
A bit harsh perhaps. But a point well made. And that’s how it is with the financial system today. It hasn’t died yet, so it won’t. But things weren’t always thus.
Back in the early seventies the financial system as we know it kicked off. It was an experiment that completely removed the US dollar from the gold standard. And as the seventies progressed, investors grew sceptical.
Investors didn’t trust it. Loose monetary policy and over-printing dollars to finance war and the like was questioned. Confidence in the dollar was shaken, and gold raced up from $35 an ounce to $850.
In the end, Paul Volker was installed as Fed chairman and fought tooth and nail to maintain confidence in the dollar. Interest rates skyrocketed to rebuild confidence in the dollar.
But of course, all of that is history. And for most investors that’s where it’s staying.
The only reason we’ve not seen a serious run on paper money is because there’s blind faith in it. “It hasn’t died yet. So it won’t.”
But ageing brings on death
I love reading and listening to investors that were around during the manic gold bull of the seventies. Though many dismiss the gold run as an aberration, never to be repeated, others see striking similarities between our situation today and the one back then.
The US continues to meddle with the dollar (because they can get away with it). They’ve printed money like never before and I expect to see more of it. It’s as if the fiat experiment is now fully validated, so they go even further. The Fed seems to think that the dollar is unbreakable.
But printing money to finance aggressive Keynesian policies seems doomed to failure. They’ve been discredited before, and I think they’ll be discredited again.
And then there’s ageing Europe too. Though they’re trying to maintain a strong currency and avoid money printing, their approach leads to other problems.
I won’t go into detail on the eurozone’s failings. But I will suggest that, some time soon, money outflows from the weaker states to the stronger ones will become too much to bear. Who’s going to keep their money in a Greek or Portuguese bank when they can stick it in a euro account in Switzerland?
So they’ll have to introduce controls on movement of capital. And when investors can’t move their euros freely out of the peripheral states, I expect gold to rally. Suddenly, investors that have been asleep will wake up in the seventies.
I don’t know which will cause gold to make its upward break first. Whether it’s US/UK/Japanese style money printing, or potential European capital controls/banking crisis, or perhaps both.
Of course, I may be totally wrong. Maybe I’m just too cynical. Maybe the authorities will muddle on through. Their interminable can-kicking might just buy them enough time to maintain confidence.
But I’m not taking any chances.
Two great ways to profit from soaring gold
As a general guide, I’d have 10% of your wealth in precious metals. And then use my trading strategy on top of that to profit from the gold bull. It could prove very interesting over the months and years ahead.
Now could be a great time to buy gold stocks too. They’ve had a dreadful run and there’s some exceptional value out there. Dominic Frisby is a man dedicated to gold investing. And he has a very interesting gold plan of his own.
Yesterday, he released a brand new report in which he reveals what he thinks are the five most exciting gold stocks in the world today. It’s a great read.
As Dominic points out:
“Politicians still don’t have a proper mandate from their electorates to confront the debt-related economic issues that so badly need confronting… It’s either austerity-driven collapse or debt-driven collapse’, one or the other is inevitable. In short its one big mess. And owning gold is absolutely essential in such an environment”.
Well said – but in my case, he’s preaching to the converted. I read Dominic’s stuff to pick up on the more exciting gold miners. And he has some corkers in this report.
• This article is taken from the free investment email The Right side. Sign up to The Right Side here.
Important Information
Your capital is at risk when you invest in shares – you can lose some or all of your money, so never risk more than you can afford to lose. Always seek personal advice if you are unsure about the suitability of any investment. Past performance and forecasts are not reliable indicators of future results. Commissions, fees and other charges can reduce returns from investments. Profits from share dealing are a form of income and subject to taxation. Tax treatment depends on individual circumstances and may be subject to change in the future. Please note that there will be no follow up to recommendations in The Right Side.
Managing Editor: Frank Hemsley. The Right Side is issued by MoneyWeek Ltd.
MoneyWeek Ltd is authorised and regulated by the Financial Services Authority. FSA No 509798. https://www.fsa.gov.uk/register/home.do
The Gold Profit Plan is a regulated product issued by MoneyWeek Ltd. The FSA does not regulate certain activities, this includes the buying and selling of some commodities such as gold. Advice relating to investing in gold related shares or products is regulated by the FSA. Your capital is at risk when you invest in shares, never risk more than you can afford to lose. Please seek independent financial advice if necessary. Customer Services: 020 7633 3780