Safety-First Expert Eyes King Midas

11/17/2017 5:00 am EST

Focus: COMMODITIES

James Stack

President, Stack Financial Management

Over the past six years, investors with a penchant for perennially holding gold stocks in their portfolios certainly haven’t felt much like King Midas, given the decline in bullion prices, explains Jim Stack, safety-first money manager and editor of InvesTech Research.

However, now may be a good time to start paying more attention to this glittery investment opportunity. The last big gold rally originated in 2001 following two decades of falling gold prices. Over the next 10 years, the price of the metal rose from around $260/oz to a lofty $1,890/oz before peaking in 2011.

Since then, nearly one-third of the value in gold bullion has evaporated. This fall from grace has put considerable stress on the gold mining industry, forcing companies to become leaner and more cost-conscious.

Likewise, “hot” investment money has abandoned the sector.  Today, many of the excesses surrounding those high gold prices have dissipated and the stocks are at a more attractive level.

Aside from its value as a contrarian holding in today’s market, there are more important reasons for considering an initial investment in gold right now. Traditionally, the precious metals group has served as a safe haven during times of political or financial uncertainty.

With political tensions escalating globally, particularly in North Korea and Iran, a little insurance in one’s portfolio isn’t a bad idea. Recent weakness in the U.S. dollar is another factor pointing to an investment opportunity in gold.


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The price of gold is inversely correlated with strong moves in the dollar. Previous strong declines in the U.S. exchange rate during the mid-1980s and from 2001 to 2008 corresponded with strong rallies in gold.

Today, with strengthening overseas economies and the Fed’s reluctance to normalize interest rates, the dollar could continue to come under pressure, creating a positive scenario for gold holdings. However, underlying inflation pressures are starting to emerge, and gold has long been valued as a hedge against rising inflation.

During the 1970s, bullion prices climbed from $40/oz at the beginning of the decade to just under $850/oz in 1980 as inflation rose to double-digit levels. While that certainly isn’t the case right now with today’s subdued CPI numbers, the upward trend in future inflation measures is apparent.

If pressures continue to increase, any inflationary surprises will be to the upside… and gold stocks typically love upside surprises.  Given these fundamental reasons for adding gold, we’ve initiated a 2% position in the VanEck Vectors Gold Miners ETF (GDX) in the InvesTech Model Fund Portfolio.

This move may be a little early as inflation and dollar trends are just starting to emerge, but risks are aligned for potential appreciation and gold is driven by psychology, which can shift quickly.

In determining which fund to select, we prefer investing in a gold miner ETF to adding a bullion fund, such as SPDR Gold Shares (GLD), as the mining stocks

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