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How to Profit From Gold's Historic Bull Run

Commodities / Gold and Silver 2011 Aug 20, 2011 - 01:35 PM GMT

By: Justice_Litle

Commodities

Best Financial Markets Analysis ArticleGold prices are hitting new highs in a big anniversary week -- 40 years ago on Monday, Nixon shut the gold window. There is still room for profit in this trend.

This was a historic week on multiple levels.


Amidst a backdrop of market carnage, gold prices touched new all-time highs. (In nominal terms, that is. Adjusted for inflation, all-time highs for gold are above $2,000 per ounce. We'll get there soon enough.)

At the same time, yields on the 10-year U.S. Treasury note fell below 2% for the first time in 70 years. Benchmark borrowing costs in Germany and the U.K. also fell to multi-decade or new record lows, according to the Financial Times.

Volatility approached historic highs too. Violent sell-offs in equity markets took a pattern of starting off in Europe.

On Thursday, for example, the German DAX plunged 4% due to an unknown source of heavy selling. U.S. markets then followed in their later opening, a terrible manufacturing survey adding to the gloom. (Some used the word "catastrophic.")

Investors are losing hope in the recovery and losing faith in the powers that be. The threat of recession and deflation in turn begets the destruction of paper currencies. As an alternative they are turning to gold.

This is a fitting week for gold to go vertical because of one other notable bit of history. It was 40 years ago this past Monday -- Aug. 15, 1971 -- that President Richard Nixon shut the gold window, essentially declaring to the world that "we are all Keynesians now."

As Edmund Conway wrote in the U.K. Telegraph:

It was one of those seminal moments whose significance has only gradually become apparent, obscured as it was at the time by Vietnam and then Watergate. But the more one examines economic history, the more obvious it is that this was one of the most important policy decisions in modern history.

Were it not for that decision, it is quite feasible that we would not have suffered the financial crisis of the past four years; or indeed the crisis after crisis that have beset the world's markets. We might not have just faced the most volatile few weeks in markets since 2008.

"All Keynesians now" indeed.

Gold Prices
There has been a lot of talk recently that gold is overbought. That may be true, and it's one reason Macro Trader recently took partial profits on our long gold and gold stock positions.

It's also helpful to remember, though, that oscillators -- measures of overbought and oversold conditions -- can be worse than useless in times of mania and crisis. With strong and persistent pressures, that which looks "overbought" just keeps getting more and more overbought. That which looks "oversold" just keeps getting more and more oversold.

On Aug. 8, gold prices gapped higher after a strong trend move on heavy volume (as shown in the GLD chart above).

At first, technicians were inclined to call the move an "exhaustion gap," suggesting the trend was close to done. But now it is being reconsidered as a "measuring gap" -- which would suggest we are only halfway through.

At some point gold prices will correct (though perhaps not as swiftly and deeply as those on the sidelines would like). The question, though, is what is the long-term trend, and how to take advantage of it?

Stretching out the time horizon a little, the next $100 move in gold is not as important as the next $1,000 move. All things being equal, gold $3,000 is likely. (The multinational bank Standard Chartered has made a strong argument for gold $5,000, which makes $3K look conservative.)

So how to exploit a potential rise like that? Is it too late? It may feel that way at times. But in truth, the game is still in early innings.

We haven't seen true "mania" yet. We haven't seen institutional asset allocators put 5% of their portfolio holdings in gold yet. And in terms of macro drivers, it is still fresh news that the Federal Reserve will be leaving interest rates at zero -- the big ZIRP -- for years.

There will be big ups and downs, no doubt. And for those less inclined to trade, there will be opportunity in gold stocks. Particularly low-cost junior resource plays.

In some ways it's surprising. The gold miners, and particularly the juniors, have not been heavily caught up in the golden bull run yet.

Perhaps this is because gold's rise still feels odd -- somehow temporary, another flash in the pan. When Mr. Market wraps his head around a permanently higher gold price, however, that could be the game changer.

If you're loving this article, sign up for Taipan Daily to receive all of Justice Litle and Joseph McBrennan's investment commentary.Your editor remembers, for example, when crude oil futures traded above $30 a barrel for the first time (barring a quick spike in the 1991 Gulf War). It was a bit over 10 years ago, give and take. How strange and exotic it felt to see that barrier broken. And now, $30 oil is just a dream.

As one prominent gold fund manager says, you can buy gold above ground (the metal itself) or you can buy it below ground (the mining shares). Buying below ground offers more upside to the gold price. There are still gold plays out there with excellent leverage to much higher gold prices -- more than a few with share values in the $5 range or below.

We are going to ferret out a few of these for Macro Trader, and my fellow editors already have a few high-quality names on the books. Consider them for a longer-term trade.

Publisher's Note: If you want more on gold and what a fiscal meltdown means for the world's most important metal, you need to read Justice's latest special investment report.

Don't forget to follow us on Facebook and Twitter for the latest in financial market news, investment commentary and exclusive special promotions.

Source :http://www.taipanpublishinggroup.com/tpg/taipan-daily/taipan-daily-081911.html

By Justice Litle
http://www.taipanpublishinggroup.com/

Justice Litle is the Editorial Director of Taipan Publishing Group, Editor of Justice Litle’s Macro Trader and Managing Editor to the free investing and trading e-letter Taipan Daily. Justice began his career by pursuing a Ph.D. in literature and philosophy at Oxford University in England, and continued his education at Pulacki University in Olomouc, Czech Republic, and Macquarie University in Sydney, Australia.

Aside from his career in the financial industry, Justice enjoys playing chess and poker; he enjoys scuba diving, snowboarding, hiking and traveling. The Cliffs of Moher in Ireland and Fox Glacier in New Zealand are two of his favorite places in the world, especially for hiking. What he loves most about traveling is the scenery and the friendly locals.

Copyright © 2011, Taipan Publishing Group

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