This year has been challenging for the whole world largely thanks to the novel coronavirus pandemic. But more broadly, the fight for regulators has been ongoing since the 2008 financial disaster. Since then, central banks have been playing the role of economic saviors. Governments have been in one quantitative easing (QE) program after another. The process took a big turn for the extreme this year which will cause an inflation problem later. However, owning gold stocks will help offset this devaluation of currency. Silver also is a viable alternative, so it can also help in that fight.
Scientists are hard at work trying to find vaccines for Covid-19, and they say they are close. Meanwhile, the U.S. Federal Reserve has become more aggressive than ever in its QE efforts. It is making available trillions of dollars so that the economic conditions don’t seize. Social distancing may ease the people’s worries, but it’s killing companies. People make the world go round and when they don’t move, things grind to a halt.
One of the side effects of loose money strategy is the devaluation of the currency. The simple gauge of this is with the frequent use of the term trillion. We now use it daily in general conversations. I remember when the TARP program dropped jaws and that wasn’t too long ago. Now the government relief amounts are almost rounding errors in in comparison. The “skinny deal” they are now negotiating in the White House could be three times bigger than TARP. And that was to fix the worst financial disaster in history.
The bottom line is that governments are killing the value of money. Our strategy today is to shelter some wealth in assets that they don’t control. Gold, silver and Bitcoin qualify for that purpose. But for the purpose of this discussion, I’m going to stick with exchange-traded funds to buy that hold silver and gold stocks:
- SPDR Gold Shares (NYSEARCA:GLD)
- VanEck Vectors Gold Miners ETF (NYSEARCA:GDX)
- iShares Silver Trust (NYSEARCA:SLV)
Key Ways to Invest in Gold Stocks: SPDR Gold Shares (GLD)
One way to protect against the systemic destruction of money is to bet on gold. There is no substitute to owning the real thing, so today’s thesis is to have gold in hand. But it’s not practical because it is clunky and too risky to store at home. Luckily, there is the GLD ETF, which is very closely tied to the actual price of gold. It is liquid so as long as the financial systems and societies have not collapsed. From a practical perspective, owning GLD is as good as hold the real thing. This will help us implement the thesis quickly and put it into action.
Gold prices rose to their highs in 2011 after the 2008 financial crisis. That was not a coincidence because back then governments were in panic mode. Like now, central banks embarked on a loose money policy that demolished currencies. It also was not a coincidence that as gold made its highs the U.S. Dollar crashed into its lows. This is proof positive that owning gold is the right long-term hedge against government manipulation of wealth.
Owning the GLD ETF makes for a great substitute to buying physical gold. It’s instantaneous and doesn’t need any operational planning. Taking the position is either a click of the mouse or a call to the broker away from happening. GLD traces the real price of gold very closely and it too just set a new high. As the price of gold hit $2,000 per ounce the GLD almost hit $200 per share. Technically, it seems overextended and could dip towards $160. But the idea is to own it for decades, so over the years it won’t matter much. Meanwhile, it’s doing its protective job.
VanEck Vectors Gold Miners ETF (GDX)
The GDX ETF is not a direct play on gold, but it is tightly tied to its price. This is a collection of gold stocks from the mining side. They profit more as the price of the shiny stuff rises. Since it is a collection of operational P&Ls then there are variables that kept the GDX from making new highs. In fact, it is still over 30% below the high water mark there. But for now there are special circumstances that could make it an interesting trade.
There are advantages to owning GDX stock over the other two. First and since it is a collection of stocks, it pays a dividend. Over the years this makes for a nice tail wind through the power of reinvestment. Second, it moves much faster than the others so it also offers great trading opportunities for those who like that. For example, on Friday when the GLD stock was down 0.28%, the GDX was down 0.7%. This multiplier opens the door for active traders to trade around the dips.
I am not suggesting to do that with the whole allotment, but some would be fine. Besides the collection of companies that make up the ETF have learned harsh lessons over the years. The swoon that came after 2011 was a giant wake up call. Perhaps oil stocks are now going through similar pains. Barrick Gold’s (NYSE:GOLD) CEO discussed these fine points, including how they are dealing with the pandemic. If indeed Gold prices take a breather and retreat as the U.S. Dollar rallies, then the GDX will suffer.
iShares Silver Trust (SLV)
The last option today is a cousin to gold. Silver is not as valuable, but will tag along gold for the ride. It is a precious metal and it too is not under the direct influence of governments. It will hold value better than currencies that are in free fall scenarios. The SLV ETF chart resembles that of GDX as it too is far from its highs. This reinforces the idea that there’s no real substitute to gold. However, SLV continues to track price of GLD well enough to serve our thesis.
Anything that rallies 150% has to give back some and that’s what happened here. The SLV is fallen 22% from the recent highs, but that’s part of normal price action. The bulls are still in charge and they are likely to buy the dips. However, the same caution exists here as in the other two tickers we note today. There could be red days ahead. It is important to remember that this is a long-term hedge against a threat to wealth. This is not a trading strategy, and near-term swoons are part of every stock cycle.
There is also a distinction in the definition of near term. The government actions will take a very long time to cripple the currencies. Therefore, when we say “near term” we mean years. Investing is different than trading and the goal today is to hedge against an imminent threat. Just like buying home insurance, we are not upset that we wasted the premium because our house didn’t burn. This is not a fiscally savvy choice.
On the other hand and for a side trade, my favorite of the three right now is the GDX. It fits my thesis best, so it has the best upside short-term opportunity. The stock markets have been correcting for a month, so it’s due for a bounce. I don’t think we will fall much further going into an election season. If that’s true, then the GDX ETF will rally fastest since it’s a collection of stocks. This year it’s already out-performing the NASDAQ, GLD and SLV … and that’s likely to continue.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Nicolas Chahine is the managing director of SellSpreads.com.