How To Take Advantage Of The Current Bull Market In Gold

David Levenstein
27 September 2010

As the US dollar, the reserve currency of the world, continues to weaken, the price of gold as well as the relative value of other currencies will continue to increase. Only last week, the price of gold made another historic high as it traded above $1300 an ounce for the first time ever.

The US dollar index dropped 0.91% to $79.39 while the euro rallied 1.24% to $1.34 vs. the dollar. The US dollar index which measures the relative value of the US dollar against a basket of six currencies broke a key support level of 80 and at one time traded as low as 79.36. The EUR/USD broke the key resistance of 1.3330 which indicates that the low was posted around the beginning of June at 1.1875. In the short-term we should see a further rally to 1.4500. The USD/CHF recently traded below parity, and since the beginning of the month, the Australian dollar, the best performer of the 16 most traded currencies, has jumped 6.4 percent against the dollar, while the South African Rand has gained almost 6 percent. The Brazilian real has gained 1.7 percent and the New Zealand and Canadian dollars are up 4.4 percent and 3.6 percent respectively.

For several years now, I have advised investors to accumulate physical gold as it has been my belief that the current global financial and currency system is faltering. However, I never expected an all out global currency war. This will lead to further devaluations in several currencies in particular those whose economies are dependent on exports. The problem is, as a currency is debased, the piece of paper that the currency is printed on becomes worth less. And, in order to preserve the value of your wealth, it is necessary to own gold. Right now, gold is merely performing its traditional role as a hedge against the declining values of currencies.

Traditionally, portfolio managers have invested in bonds as a means of diversifying their equity portfolios and thus they have developed a culture where dividend and yield are paramount. However, in today's economic climate I believe that such an allocation no longer represents an effective strategy and that gold is a much more effective way to diversify ones investment portfolio.

So the question is what does an individual do to participate in the current bull market in gold. It is my firm belief that it is absolutely imperative to first create a core holding of the physical metal. This can be done by acquiring bullion bars and bullion coins. But, it is important to stick to bullion and not be beguiled by unscrupulous dealers who try to convince individuals that certain so called "rare" coins offer better potential. All they are trying to do is to sell you a more expensive product that usually has a huge premium, in an attempt to make more money….for themselves. These so called 'rare" coins are not numismatic coins, but are usually commemorative and inaugural medallions as well as limited edition medallions. You cannot create rarity by simply restricting the number of medallions you decide to mint. Rarity is determined by the number of coins left out of an original mintage. There is nothing special about limited edition medallions. Usually, they are introduced into the market (commemorating some event or some well known person) at exorbitant premiums, sometimes a few hundred percent above the spot price of gold.

The reason why I prefer owning physical bullion is because it is yours. If you have it in your possession, it is yours and it does not incur any third party liability. Another reason why I prefer to own my own physical gold bullion is because I don't trust a lot of the financial institutions. I recall when a prestigious company such as Morgan Stanley agreed to pay $4.4 million to settle a class-action lawsuit with brokerage clients who bought precious metals and paid storage fees, when in fact it was alleged that Morgan Stanley wasn't physically storing their gold and silver at all.

Once you have accumulated some physical gold, then you may investigate the other gold related investment products available. Of course the one that comes to mind immediately are the gold exchange traded funds (ETF's). These offer investors a convenient way to own bullion as they don't have to worry about storage. In the meantime their investment tracks the price of gold in their respective national currency.

Traditionally, gold shares out-performed the gold price and were, therefore, included in almost every portfolio tracking gold. But, in recent times we have seen that some of these shares lag behind the gold price in particular the South African gold mining companies. In some instances some of these shares are way below their all time highs despite the fact that the price of gold in US dollar terms is at an historic high, and that the price of gold in Rand terms is just a touch below its all time highs. Either, there is something seriously wrong with these companies, or they are trading at incredible valuations.

Gold funds are another way an investor can partake in this bull market. By doing this, the individual is leaving the management of their funds to a market professional who is dealing with precious metals.

And, for those investors who are prepared to take some risk in trying to make the real big money, then there are futures and options. However, in the case of futures contracts since these are leveraged instruments, you had better be prepared to stomach some sleepless nights along the way as the short-term movements can scare the living daylights out of you. However, if you have huge funds and especially if they are not your own then riding these short-term movements won't feel so bad. But, in any event it is not that easy to be a successful trader. And, there are options. The problem with options is what is known as "time decay." Unless the market moves in your favour before the expiry date, your premiums will disappear into the hands of the market maker who sold you the option. A large percentage of options usually expire worthless and only a small percentage of individuals make money speculating on the futures markets. I therefore always advocate going for the long haul and simply accumulate the physical metal as often as you can. This market has a long way to go before peaking.

TECHNICAL ANALYSIS

When the price of gold broke through the key resistance level of $1260 an ounce, it suggested that it finally broke out of a trading range between $1160 - $1260. This indicates that the upside of this particular move could see gold test $1350/oz.

ABOUT THE AUTHOR

David Levenstein is a leading expert on investing in precious metals . Although he began trading silver through the LME in 1980, over the years he has dealt with gold, silver, platinum and palladium. He has traded and invested in bullion, bullion coins, mining shares, exchange traded funds, as well as futures for his personal account as well as for clients.

His articles and commentaries on precious metals have been published in dozens of newspapers, publications and websites both locally as well as internationally. He has been a featured guest on numerous radio and TV shows, and is a regular guest on JSE Direct, a premier radio business channel in South Africa. The largest gold refinery in the world use his daily and weekly commentaries on gold.

David has lived and worked in Johannesburg, Los Angeles, London, Hong Kong, Bangkok, and Bali.

For more information go to: www.lakeshoretrading.co.za Information contained herein has been obtained from sources believed to be reliable, but there is no guarantee as to completeness or accuracy. Any opinions expressed herein are statements of our judgment as of this date and are subject to change without notice.