Gold prices were sleepy in 2016, on paper. The precious metal rose 9% compared with roughly the same gain for the S&P 500 index and the Nasdaq 100 Index.
But a closer look shows significant volatility along the way. In other words, if you bought gold at the bottom of about $1,050 a year or so ago and sold at the top of $1,400 or so in summer, you made a nearly 35% gain. On the other hand, if you bought the mid-year top and sold during the December lows for gold prices, you lost almost 20%.
This kind of movement is common in commodities like gold, crude oil and other materials. And wise investors know how to use the volatility in gold prices to their advantage.
Right now, these savvy traders are salivating over gold prices as the precious metal looks to power higher:
- Trump Rhetoric: Lot of Donald Trump’s comments lately, from posturing over Taiwan to continued tough talk about NATO, has been adding to uncertainty about global markets and geopolitics. When uncertainty is the rule, gold prices rise.
- Wane of the Reflation Trade: While President Donald Trump takes office this week, many investors are closing out their risk-on trades bought on after his election. After all, a quick double-digit gain in stocks from Election Day through Christmas priced in many of the anticipated pro-business policies. As stocks fade in an increasingly risk-off environment, gold will rise.
- Brexit Fears: It’s not just Trump alone fueling global uncertainty. British Prime Minister Theresa May roiled markets recently after saying the U.K. will not be a partial partner in the EU and will leave the shared euro zone market altogether. That could be messy, and risky for companies with exposure there. Again, as uncertainty abounds, it favors gold prices.
- Dollar Slumps: President Trump recently said the dollar was “too strong,” and America’s currency has softened to its lowest levels since early December. When the greenback falls, gold prices rise because its value is denominated in U.S. dollars.
- Correction Fears: If all this wasn’t enough to cause concern for stock investors, we continue to see stretched valuations with the S&P trading for for almost 18 times forward earnings. Those reluctant to chase the bull market into its eighth year are increasingly seeking out safe haven assets, like gold.
How to Invest in Gold Prices
Well, if you’re looking for a pure play on gold then trust in bullion-backed exchange-traded funds like the iShares Gold Trust(ETF)(NYSEARCA:IAU) or the SPDR Gold Trust (ETF) (NYSEARCA:GLD). These funds are directly tied to gold prices.
A popular trade for those looking for a bit more potential (and a bit more risk) is to invest in gold miners. While gold prices are up 5% or so year-to-date, many gold miner stocks are up even more. Barrick Gold Corporation (USA) (NYSE:ABX) is up almost 6% and Goldcorp Inc. (USA) (NYSE:GG) is up 11%, for instance.
But what if you don’t want to buy individual miners? The way to play this trend in a diversified way is via bigger miners in Market Vectors Gold Miners ETF (NYSEARCA:GDX) or small-cap miners via Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ).
And, of course, for those who are aggressive investors there are the triple-leveraged ETFs including Direxion Shares Exchange Traded Fund Trust (NYSEARCA:NUGT), or Direxion Shares Exchange Traded Fund Trust (NYSEARCA:JNUG), for smaller miners. These provide 3x exposure to bigger miners and junior miners, respectively. NUGT is up almost 30% YTD and JNUG is up almost 50% YTD.
Of course, they also provide 3x the losses if they stumble. So be wary of placing too much cash in these very risky funds.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at email@example.com or follow him on Twitter via @JeffReevesIP.