Knowing what to invest in is only half the battle. Especially in today’s choppy market environment.
The best investors don’t just pick a stock (or a commodity) and fire off a buy order.
Taking a bit more time to figure out the best structure for a trade can help you on several fronts including:
- Increasing your return.
- Managing your risk.
- And using your capital more efficiently.
Last week we took a look at the backdrop for gold. Rising inflation, geopolitical tensions, and the technical chart pattern all point to higher gold prices ahead.
So today, I want us to quickly cover three different ways you can structure an investment (or trade) to profit from rising gold.
Investing in Physical Gold
Many investors own physical gold as a safeguard in case our entire financial system shuts down.
The idea is that if cash in the bank or stock positions are unavailable, at least you can get your hands on your valuable gold.
In this situation, I’d probably rather be heavily invested in bullets and bottled water (to protect my family). But physical gold and silver can also come in handy. Especially if you have small increments (like coins or other small items) that you can trade for food or transportation.
One of the most reputable companies to purchase silver or gold from is Hard Assets Alliance (HAA). This company can securely mail you physical gold that you can keep in a safe at your home. Or HAA can also store your specific gold or silver items in one of it’s vaults (which are located around the world).
The company I write for — St. Paul Research in Baltimore — has a financial arrangement with Hard Assets Alliance. We believe in their products and have arranged a deal to help teach our customers about this valuable resource.
With that said, I’m not being compensated for mentioning them in this article, and do not have any affiliate benefit if you click the link to HAA above.
Financial (or Market-Based) Gold
A second way you can profit from rising gold prices is by trading or investing in market based securities tied to gold.
With today’s financial markets, it’s very easy for individual investors to make a direct bet on the price of gold using a standard brokerage account.
For most investors, the SPDR Gold Trust (GLD) is a good option. Shares of GLD track the price of gold and the fund is managed efficiently. That way you don’t have to pay excessive fees for your investment.
The iShares Silver Trust (SLV) is a similar fund that closely tracks the price of silver.
You can buy either of these securities in a normal brokerage account or even an IRA.
While the transaction is very easy, you should know that you are not buying a claim on physical gold or silver. These funds purchase actual physical gold and sliver to back the value of shares in the market. But you cannot exchange your shares for the physical gold or silver held by the fund.
Another option for more sophisticated investors is to buy gold or silver futures contracts. These financial contracts closely track the price of gold or silver. But when you buy a future’s contract, you’re counting on the clearing firm behind these contracts to make good on their obligations.
Historically this hasn’t been a problem. But this process could fail if our financial system is compromised.
There are also leveraged ETFs that track the price of gold or silver, and multiply price moves by two or three times. (So if the price of gold increases by 1% in a day, a 3X fund would increase by 3%.)
These funds can be good for short-term trading. But because of the way the math works as prices swing back and forth, I would avoid holding any leveraged ETF for an extended period.
Profiting from Gold Miner Stocks
A third way to profit from rising gold prices is by investing in mining stocks.
Many of these stocks can give you high-powered returns ass gold prices rise. Remember, gold miners typically have large underground reserves — and when the price of gold rises, the value of these reserves goes up as well.
Investing in gold miners comes with its own set of challenges though.
In today’s environment, many miners face higher operating costs thanks to inflation. Equipment, materials and labor are all becoming more expensive.
As an investor, you need to know whether gold prices are rising fast enough to make up for these higher expenses.
You should also be aware of whether a mining company hedges its exposure or not.
Many of the largest mining companies “pre-sell” their expected production for years to come. Some miners do this for the majority of production, while others hedge only a portion.
If gold prices rise sharply, but a mining company has already agreed to sell its ounces at last year’s prices, the mining company won’t lock in higher profits. The stock price will be less likely to increase because the mining company won’t get as much of a benefit from higher prices.
Gold mining stocks can be excellent investments under the right circumstances. But you must do your due diligence to understand the companies you’re invested in.
I like the idea of investing a bit into all three of these options. That way, your exposure to precious metals is more diverse, and you can benefit from the potential advantages of each way of investing in gold.
Now, let’s switch gears and take a look at some of the research crossing my desk today.
Interest Rates and Inflation
- WSJ: Fed’s Williams: Fed can boost rates by 50 basis points if needed.
- Williams said the Fed needs to be nimble and “adjust as we go.”
- Other members of the Fed have spoken, leaning towards larger hikes.
- Financial markets have been increasing expectations for interest rates.
- CNBC: 5-year and 30-year yields invert for first time since 2006.
- The yield curve inversion raises fears of a possible recession.
- Most traders pay more attention to the 2-year / 10-year curve.
- Historically, this yield curve has inverted prior to recessions.
- Bloomberg: Disease outbreaks to drive U.S. meat prices higher.
- Hog diseases are shrinking herds in Mexico, limiting supply.
- Mexico is now importing more meat from the U.S., driving prices higher.
- Reuters: Oil slides on concerns of weaker Chinese demand.
- Shanghai launches lockdowns, curbing Chinese demand for oil.
- April demand is expected to be 800k barrels lighter than usual.
- OPEC will meet on Thursday to discuss a planned increase in production.
China’s Economic Impact
- WSJ: Shanghai to lock down 25 million people.
- Shanghai will be locked down in two phases over the next 1.5 weeks.
- A cut in commercial activity in Shanghai will have ripple effects.
- Many manufacturers such as Tesla and GM have factories in Shanghai.
- Bloomberg: China oil giant plans record energy capex.
- Sinopec will spend record amounts this year to increase energy drilling.
- Projects in Russia are going “smoothly” with no risks of impairments.
- Sinopec holds a 40% stake in Russia’s Sibur Holdings conglomerate.
Stocks & Cryptocurrencies
- CNBC: Tesla wants to split its stock.
- SEC said Tesla will ask investors to authorize an increase in shares.
- This would pave the way for a stock split.
- In 2020, the stock split 5-for-1 and has more than doubled since then.
- CNBC: Russia considering selling its oil and gas for Bitcoin.
- Russia’s committee on energy said payment options can be flexible.
- Bitcoin spiked about 4% when the comments were aired.
- Putin still requiring “unfriendly” countries to pay for gas in rubles.
- Bloomberg: Exxon weighs taking gas-to-bitcoin pilot to four countries.
- XOM using excess natural gas to power cryptocurrency-mining operations.
- The oil giant is already doing this in North Dakota.
- Now, XOM is considering similar projects in four other countries.
- CNBC: Britain will reveal crypto regulation plans in coming weeks.
- British Finance Minister expected to announce new regulatory regime.
- The Minister will focus specifically on stablecoins.
- The regulations are expected to be favorable, provide clarity.
