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U.S. Federal Reserve Chairman Ben S. Bernanke is caught between a rock and a hard place right now.
Sure, he would prefer that you focus on "core inflation," since it excludes sharply rising food and oil prices. But we all have to eat and we all consume energy. It's just a matter of time before core inflation starts rising alongside corn, wheat, beef and prices at the pump.
Ordinarily, the Fed would start raising rates to stave off higher prices.
But Bernanke really doesn't want to be an inflation hawk right now. Raising rates would only make the already weakening economy weaker still. (Never good in an election year).
If Bernanke has to choose between a weaker economy and moderately higher inflation, I believe he will choose higher inflation, hoping that he can put the genie back in the bottle once the economy is growing again.
Since gold traditionally rises with inflation, that means now is probably a good time to add to your holdings.
Here are the essential facts:
At one time the world's monetary system was based on gold. It is a universally recognized store of value. It can be bought and sold in any country.
And it is scarce. There are 4 billion ounces of gold in people's hands, enough to fill a cube 60 feet on a side. Of this, investors own 1 billion ounces, and central banks another billion, with the remaining 2 billion ounces accounted for by jewelry and other baubles.
Last year, more than 80 million ounces were extracted worldwide. Two-thirds went to jewelry makers and the rest to bullion.
If you want to own gold that you can touch, you can buy bullion. But there will be a markup when you buy it or unload it - and fees to store and insure it. The same is true of coins, especially with numismatics.
Understand, too, that while gold has been in a major uptrend over the past few years - hitting an all-time high of $1,030.80 on March 17 - shares of the natural-resource companies that bring the gold to market have performed considerably better. That isn't likely to change.
Over the past 50 years, major gold mining companies have risen at an annual rate of approximately 12%. That's better than the return of the Standard & Poor's 500 Index, although the trade-off has been head-snapping volatility along the way.
Perhaps the most conservative way to buy blue chip mining companies is to plunk for a few shares of Market Vectors Gold Miners (GDX) Exchange Traded Fund.
An ETF, Market Vectors is linked to the AMEX Gold Miners Index and owns all of the world's leading gold and silver mining companies. That means you can capture the performance of the entire sector in a single, well-diversified investment.
The annual expense ratio is one half of 1%. The shares can be margined or sold short - and there are options available for traders.
Here are some of the stocks among the Top 10 holdings:
- Newmont Mining Corp. (NEM).
- Freeport McMoRan Copper & Gold Inc. (FCX).
- Barrick Gold Corp. (ABX).
- Anglo American PLC (ADR: AAUK).
- Harmony Gold Mining Co. (ADR: HMY).
- Kinross Gold Corp. (KGC).
- Yamana Gold Inc. (AUY).
- Gold Fields Ltd. (ADR: GFI).
- Agnico-Eagle Mines Ltd. (AEM).
Right now the economy is weak - and the outlook for inflation is poor. But this is creating plenty of profit opportunities - if you know where to look.
So pick up a few shares of Market Vectors Gold Miners ETF - or talk to a resource broker.
Tell them Ben Bernanke sent you...
[Editor's Note: Alexander Green is Investment Director of The Oxford Club and Chairman of Investment U. To get Green's actionable investment ideas three times a week - at no charge -for the Investment U e-letter. If you join for free today, they'll send you their latest special commodities research report: "Five Million Reasons to Load Up On Coal Now - and Three Easy Ways to do it." You'll find out why the standardized shipping container is driving coal demand through the roof -and how that's delivering literal "boatloads" of profits to three companies. Just to have your report delivered in less than two minutes. Again, the report, and the service, both are free of charge.]
News and Related Story Links:
The Wall Street Journal:
Fed Confronts Spike in Inflation; Consumer Prices Surge, but Stumbling.
Money Morning Special Investment Research Report:
Money Morning News Analysis:
As Treasury's Paulson Prescribes Bailout for Fannie Mae and Freddie Mac, Guru Jim Rogers Predicts an "Unmitigated Disaster."
The Market Oracle:
Gold and GDX ETF Breaks Higher.