Three Ways To Play $2,000 Gold

Stocks were slaughtered fresh out of Labor Day weekend, as renewed fears of the euro-zone’s debt crisis dragged equities across the board. While the U.S. enjoyed a holiday-extended weekend, Europe was not so lucky; a massive sell-off on Monday propelled the Stoxx 600 Europe index to losses of 4.1% as many fear that the worsening debt issues in numerous European countries will put an anchor on the global economy. U.S. investors digested Monday’s international performance and quickly sold out upon Tuesday’s opening bell. Along with worries over the future of the euro-zone, the U.S. jobs report last week did little to boost confidence in our sluggish recovery efforts [see also Top Seven Strangest Commodity Futures].

Amid all of the turmoil on Wall Street, there is one asset class feeding on the downfall of equities; gold. As recent weeks have brought stiff market volatility, gold has broken through a number of historic barriers, including the newly crushed $1,900 per ounce mark. While gold has always been considered a safe haven in times of turmoil, lately, the precious metal has seen heavy inflows (and outflows as well) as stocks sway back and forth, shaking investor confidence. As it seems that we will surely have hard days ahead of us, at least in the short-term, gold prices hitting $2,000 per ounce seems to be a matter of when, not if [see also The Guide To The Biggest Companies In Every Major Commodity Sector].

While many have their opinions as to whether or not the metal is overvalued or overbought, gold will continue to remain a popular turning point for as long as markets falter. Below, we outline three ways to make a play on gold as it approaches the historic 2k mark:

Barrick Gold Corporation (ABX)

Barrick is the largest gold mining company in the world, with a market cap topping $53 billion. The company has an astounding level of proven gold reserves somewhere near the 140 million ounces mark. If gold were to hold a steady $1,700 per ounce price (a conservative estimate), that reserve would be worth $238 billion, at gold’s current price of about $1,873, the reserve values at about $262 billion. Most mining stocks exhibit high betas and tend to move much more than gold itself, but Barrick is something of a rarity in that it has a current beta of just 0.61. This may turn some investors off who are looking for the pseudo-leverage that miners put on gold, but others may be intrigued to find a more stable gold miner [see also Company Spotlight: Barrick Gold Corporation (ABX)].

SPDR Gold Trust (GLD)

Physical exposure to gold has become extremely popular thanks to the rise of the ETF industry. This fund represents physical gold, with one share reflecting roughly 1/10th ounce of the yellow commodity. Holding physical bullion alleviates a number of risks that are tied to exposure through miners or futures, leading many investors to adopt this vehicle for their gold exposure. Investors can buy this fund and hold it over the long term, but its average volume of over 21 million also makes it a prime candidate for active trading. The ETF charges an expense ratio of 0.40% so for those looking to minimize costs there is another physical gold product from iShares, IAU, which represents 1/100th ounce of gold and charges just 0.25%.

GC Gold December 2011

A number of investors prefer futures contracts when it comes to commodity exposure. For those who can handle the risks and complexities of futures trading, the December 2011 contract for gold will be a good one to watch. The future is currently sitting at $1,874.60 and is one of the most traded contracts out of the dozens offered. Demand for gold typically increases in the fourth quarter, as a number of emerging markets ramp up their use of the precious metal, especially India which is historically one of the biggest consumers of gold. As such, the December contract may be subject to more volatility than others, and can make for an interesting play [see also Commodity Investing: Physical vs. Futures].

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Disclosure: No positions at time of writing.

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  • Mee

    In 1980 the Dow/Gold Ratio was 1:1 (ie 800 Dow vs $800/oz Gold)   Forum: Gold Forum
    (vronsky)Oct 08, 09:36 above 31-year chart clearly shows the Dow/Gold Ratio peaked in 1999 (11800 Dow vs $246/oz Gold). But since 1999 the Dow/Gold Ratio has reletlessly fallen and looks to retest the 1980 benchmark low of 1:1 Dow/Gold Ratio.But this begs the question:What will the equilibrium price of gold and the Dow, when the ratio is again 1:1?5000:$5000….or10,000:$10,000…or15,000:$15,000 ????My considered guess it will be 15,000 Dow vs $15,000/oz Gold — for the following reasons.- Debt Crisis burdens the world…horizon to horizon. Therefore, expect currency debasement and intentionally fosterted inflation to relieve this burgeonous and unsustainable weight.- This will inflate the value oF ALL INVESTENTS. Therefore, the first two equilibrium prices (5000:$5000 and 10,000:$10,000) are NOT feasible for obvious reasons.This only leaves the third Dow/Gold price ratio of 15,000:$15,000 as the only possible alternative. Firstly, widespread currency devlauations will fuel the value of stocks and gold upward. However, more money proportionally will pour into gold as an historically safer haven than stocks.Secondly, 1,3 Trillion Chinese have awaken to the real savings investment of gold. Furthermore, The Peoples Bank of China must diversify its $3.3 TRILLION in Foreign Reserves (most of which is denominated in US Dollars). Consequently, gold demand will sky-rocket.Thirdly, in the early 1970s there were 5 gold investors for every 1,000 investors. But by Jan1980 gold investorsexploded to 50 per 1,000. Today, some experts estimate there again is only 5 gold investors for every 1,000. Indubitably, this will rapidly expand as the gold price rises.TIME FRAME for the Dow/Gold Ratio to again reach 1:1 ?(ie 15000 Dow vs $15,000/oz gold)?Based upon recent volatility, and complemented by political expediency, it is estimated the Dow/Gold Ratio may again reach 1:1 (ie 15000 Dow vs $15,000/oz gold) within the next 12-15 months. DYODD and NIA