The Five Ways to Profit From the Pending Gold Bubble

By Martin Hutchinson
Director of Global Investing Research

(The First of Two Parts)

The Fed has kept interest rates too low for the last decade, causing bubbles in tech stocks and housing, and has now begun to lower rates anew.

Other central banks have done the same, notably in China, where the economy and the stock market have overshot all reasonable forecasts.

In the long run, that's bad news for the world economy, because it translates into higher commodity prices and increasing overall inflation. In the short run, while the money injected by Fed Chairman Ben S. Bernanke from his Sept. 18 rate reduction (with perhaps another one to follow on Oct. 31) is working its magic on the economy and on the stock market, it's also hugely wonderful news for Gold Bugs.

We're going to show you how to profit from this current situation. But, first, some historical context is necessary.
Gold at $2,000 an Ounce?

Back in 1980, gold soared briefly to $850 per ounce; that's equal to $2,000 per ounce in today's money. At gold's current price of around $770 an ounce, it's highly likely gold has considerably further to rise. While the rise from $260 to $770 has been quiet and orderly, in line with the worldwide re-rating of commodities caused by Indian and Chinese demand, a further rise from this point will probably look more like the price increase of a speculative bubble.

Since the gold market and the market for gold mining companies are both small compared to the amount of money that may potentially head in that direction, the final speculative peak may be huge, with the price of gold soaring almost vertically – advancing several hundred dollars an ounce in a mere matter of weeks, only to collapse as the bubble bursts.

It's a familiar pattern – just think back to what happened to Internet shares back in the "dot-bomb" era of 2000-2001 – although this one will pay out in a very short period of time, mere weeks, as I stated.

This is a dangerous market move to play, but is potentially highly lucrative if you're both careful and very disciplined. For investors who want to surf this wave, remember: always have your trailing stops in good order on an electronic trading system, so if the market collapses while you're in a meeting, in the men's room, or out on a day trip with the family you can still exit with a profit!

The simplest way to play gold is the StreetTracks Gold Shares Exchange Traded Fund (GLD), which invests in gold directly. However for those Money Morning readers who think this is boring, and want a little more spice to their lives, I will run down and review each of the world's 12 major gold mining companies, and will pick out the couple pick out the few best values.

(Part Two: Gold Plays to Make, will appear on Thursday's Edition of Money Morning.)