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How to Play the Coming Gold Meltdown

Correction presents short-term trades and buying opportunity for long-term investors

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I suppose that the Federal Reserve is (partially) to blame for the current surge in commodity prices. There is a coordinated G-7 intervention to keep the Japanese yen from surging in order to help the decimated Japanese export-driven economy. The yen had been surging as the Japanese were repatriating foreign funds to help pay for the damage at home.

This is in effect also suppressing the U.S. dollar and is relevant for precious metals investors as they have long been viewed as anti-dollar investments. I am not sure how long this yen intervention will persist, but it may be postponing the coming correction in gold.

If you think a correction is coming as I do, you need to be careful, especially with small-cap mining stocks. If you have large gains, take some off the table as the declines in small-cap mining stocks look like a crash almost every time. Many do come back and make fresh all-time highs, but it certainly is an experience that most holders of such stocks can do without.

The Market Vectors Junior Gold Miners ETF (NYSE: GDXJ), which tracks small-cap mining stocks, has somewhat liquid options and some at-the-money June puts might come in handy here (or the relevant spread trade that aims to capitalize on the fact that the ETF has serious trouble staying above $40).

Long-term investing is about strategy; this is still a bull market in gold bullion and mining stocks and ETFs with years to run. Short-term trading is about tactics; you could have made a lot of money shorting gold stocks over the years with the proper timing.

As the great Chinese general Sun Tzu said many centuries ago, “Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.” Invest accordingly.

Article printed from InvestorPlace Media,

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