Gold Speculation

Before my recommendation today, I need to preface it with something I often say.  I am a fan of setting up a permanent portfolio as described in Harry Browne's book, Fail Safe Investing.  I believe that you should have at least half of your investment portfolio in a permanent portfolio setup.  For more conservative investors, it should be even more.

Going beyond this, I think it is acceptable for more aggressive investors to speculate with money that they can afford to lose.  It is to these people that I speak today.  My recommendations are not meant to be part of your permanent portfolio.

Gold has had an outstanding run, particularly this week.  It keeps hitting new all-time highs (in nominal terms).  While I wouldn't be surprised to see a pullback, there are a lot of reasons to be bullish on gold going forward.

One interesting thing about this latest run in gold is that gold stocks have not managed to keep up.  While the price of the metal is hitting new highs, most gold stocks are off of their all-time highs.  While this trend could continue for a while, I can't imagine it continuing forever.

Gold stocks are a difficult play.  They are far more volatile than the price of gold.  You are also taking on the risk of owning a company, just as when you buy any company's stock.  You are at risk that the government of whatever country the company operates in could violate property rights and destroy the company's investment.  You are at risk of bad management.  You are at risk that the company will not find new gold.  You are also at risk of a stock market crash, as a market crash could drag down gold stocks with it.

With all of that said, I still think this scenario presents a golden opportunity.  If gold goes into a mania phase (which it isn't yet), then gold stocks could go up exponentially.  There is no guarantee, but holding gold stocks can be like having leverage in the gold market.  If gold doubles in price over the next couple of years, gold stocks could easily go up 3 or 4 times that.  Again, there are no guarantees, but I am just pointing out the possibilities.

Owning single gold stocks is usually too risky for me.  If you are going to try this, don't put a lot of your money at risk, particularly if it is a small company operating in a risky country.

My recommendation today is to buy either GDX or GDXJ.  These are exchange traded funds (ETFs).  GDX invests primarily in stocks of companies in the gold mining industry.  GDXJ invests in smaller companies in the gold mining industry.  Both are well off of their 52 week highs.

If you are looking for a good gold speculation while wanting to avoid the risk of owning any one stock, these might be worth a look.  You can buy these through a typical online brokerage account.  While I'm not making any predictions in the short term here, I do think these two ETFs have potential for big gains over the next couple of years.