Time To Pounce On Gold

By Aaron Levitt | April 11, 2012 AAA

With the U.S. economy finally starting to turn around and show some real progress, the Federal Reserve may have finally stopped their quantitative easing programs. In the latest Fed minutes, Chairman Ben Bernanke pretty much spelled out the fact that there will be no third round of easing. Add this to China and India's recent decreases in imports and it is no wonder why gold prices have fallen sharply over the last few weeks. However, these falling prices could be just a short-term blip. For investors, now could be a great time to re-up one's holdings, as much of gold's long-term thesis remains intact.

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No QE3? No Problem
According to the latest Fed minutes, officials at the central bank believe that the economic recovery has strengthened, resulting in no immediate need for any additional economic boosting policies. Given the lack of enthusiasm for a third round of easing or QE3, a variety of risk assets sold off heavily in the wake of the non-announcement. The venerable Dow Jones Industrial Average (DJIA) dropped roughly 111 points on the news. Likewise, gold prices declined roughly 2% and the U.S. dollar index rose as much as 0.6%, as demand for precious metals as an alternative investment waned.

Gold has now dropped to its lowest level since January, making it an interesting potential buy at this point. Despite the lack of easing talk in the Fed's last report, the bullish long-term picture for the precious metal remains. While the Fed may have stopped its easing programs for now, Europe is still a basket case. The E.U.'s latest round of its Long Term Refinancing Operation (LTRO) continues to provide cheap liquidity for European banks and expand the money supply. This, coupled with the Fed's expanded balance sheet could result in higher-than-normal inflation expectations.

At the same time, demand from the emerging world is increasing. While China and India are buying less than before, the emerging market nations are sitting on roughly $10 trillion in currency reserves. Those massive reserves will need to be diversified out of dollars and euros as confidence in fiat currencies begin to wane. Already, China as well as Russia has been buying gold at record paces in order to strengthen their own currencies. Russia has announced that it wants to raise its share of gold of its reserves to 10% and China has announced it owns 1,054 tons of gold. However, analyst's project that Beijing will boost its holdings by "several thousand tons" over the next five years. At the same time, citizens in these developing markets continue to buy gold as a store of wealth. Currently, there is only about $2 trillion worth of investments in gold, or approximately 1% of all global financial assets. That leaves plenty of room for price appreciation, as the asset continues to gain acceptance.

SEE: Commodity Investing 101: Gold

Time to Buy
With the recent price declines for the yellow metal, now could be the time to consider adding the gold to portfolio. The long-term prospects for higher prices continue to remain. With more than $67 billion in assets, the SPDR Gold Shares (ARCA:GLD) still remains the king of physically-backed bullion funds. The fund features high liquidity and relatively low operating expenses at 0.40%. An even cheaper option for investors is the iShares Gold Trust (ARCA:IAU) at 0.25%. Both funds can be used as a great way to play the long-term rise in gold prices.

Perhaps more hated than the metal itself are those firms that mine gold. The Market Vectors Gold Miners (ARCA:GDX) recently hit a fresh 52-week low of $46 a share and is down around 9% YTD. Due to the miners' production cost structure, often with considerable fixed expenses, these companies can act as a leveraged play on gold prices. The fund allows investors to bet on 31 different miners, including mainstays Barrick Gold (NYSE:ABX) and Compania de Minas Buenaventura (NYSE:BVN). The fund charges 0.53% in expenses. Also in the dog pile are those junior miners and explorers. These firms are a vital link in finding new gold deposits and the Global X Gold Explorers ETF (ARCA:GLDX) offers a broad way to play these firms.

The Bottom Line
The Fed's lack of a QE3 announcement sent prices for a variety of risk assets downwards, including gold. For long-term investors in the metal, the recent downturn could be a time to strike. The previous broad funds, along with the UBS E-TRACS CMCI Gold TR ETN (ARCA:UBG), make ideal ways to add exposure to the precious metal.

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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