Published:
December 1, 2008
There are many compelling reasons why
gold should rise in value over the next few years. But instead of
mining for just the right gold stock, why not let Market Vectors
Gold Miners ETF (NYSE: GDX, $26.57) do the heavy lifting for you.
Gold is one of the rarest metals on Earth -- scientists believe that
all of the gold ever mined could fit underneath Paris' Eiffel tower,
forming a cube of just 60 yards on each side.
As a result of its rarity and traditional role as a store of wealth,
gold tends to perform well during periods of financial turmoil and
when there's risk of acceleration in inflation. And since gold is
priced in U.S. dollars, it also acts as a hedge against a falling
U.S. dollar.
With these points in mind, the current environment is conducive to
higher gold prices. Turmoil in global financial markets has
investors worried about the stability of the global financial
system; many are reaching for gold as a hedge against instability.
In fact, gold one of the only commodities that's trading higher than
it was before Lehman Brothers filed for bankruptcy in September.
U.S. inflation appears to be receding for now, thanks in large part
to falling food and energy prices. However, the Federal Reserve is
adding more than a trillion dollars to the global money supply to
attempt to stem the pain of the recent financial crisis. The Fed has
also cut interest rates aggressively and hinted at more rate cuts to
come. And governments the world over are spending hundreds of
billions purchasing preferred shares in banks in an attempt to
recapitalize the financial system.
It's likely some of this spending will ultimately be financed by
creating new money. That means that attempts to stabilize the global
economy and financial system are ultimately likely to be
inflationary. This is another big positive for gold.
GDX is an exchange-traded fund (ETF) that invests in shares of firms
involved in the gold mining industry. Clearly, gold mining companies
benefit directly from rising gold prices via higher sales prices for
the gold they mine and sell. The cost of mining gold is less than
$300 per ounce for some gold mining firms; with current gold prices
of close to $800 per ounce, these firms are highly profitable.
Individual firms in the gold mining industry can be highly volatile.
Sometimes, planned new mines just don't pan out as expected or costs
are higher than originally anticipated. And some mines are located
in politically unstable regions of the word -- political strife can
harm stocks of individual mining firms. By purchasing a broad,
diversified portfolio GDX reduces these firm-specific risks.
GDX offers an outstanding hedge for investors against resurgent
inflation risks and continued turmoil in the global financial
system. The ETF looks like a solid "Buy" candidate under $28.
Paul Tracy
Editor
StreetAuthority
Market Advisor
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About Paul Tracy
Paul Tracy co-founded StreetAuthority.com and became the firm's
Chief Investment Strategist in 2001. He also co-founded TopStockAnalysts.com in
2006. Prior to that he spent several years as Managing Editor at a multi-million
dollar financial publishing firm with over 150,000 subscribers. In addition to
his role as managing editor and lead financial writer, he was also responsible
for equity research and managing a team of seasoned professional financial
writers, researchers and market commentators.
Paul's previous experience includes a position at Robert W. Baird & Co.'s
full-service brokerage operations as well as economic research work on a Money
and Banking project funded by the National Bureau of Economic Research. He has
also spent time doing outside consulting and research for the University of
Virginia, has appeared as a guest expert on several prominent financial radio
shows, and has been a featured speaker at various investment conferences across
the U.S.
Paul graduated with a B.S. in Finance and Management from the McIntire School
of Commerce at the University of Virginia.
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