“Stocks have reached what looks like a permanently high plateau.”
Irving Fisher famously made that statement in the summer of 1929. Essentially, he made the case that this time, the stock market’s rise was different. It was a permanent gain.
That’s the philosophy behind every major market folly.
August was the worst month in the stock market since October 2008. It’s easy to see why: Plenty of data came out, refuting the idea that economic recovery was under way. But one safe-haven asset, gold, continued to perform well, rising 12 percent in August (yes, even after hitting $1,900 and pulling back).
While I believe in accumulating assets when they’re out of favor, I still believe in accumulating gold. Yes, it’s near an all-time nominal high. Yes, it’s been quite volatile. But, despite that, gold is rare, has a global investment following, and has held its value over thousands of years.
You can’t say that about most currencies today. Without the backing of any rare or precious metals, these fiat currencies are subject to the whim of political rulers.
Gold isn't a bargain like it was 10 years ago. Fortunately, it’s not a bubble yet either. But right now the bargain isn’t in the bullion. It’s in the mining companies, which have a natural leverage to benefit from gold’s rising price.
Let me explain…
A gold miner with operating expenses of $800 for every ounce of gold produced would, at $1,800 gold, make a 55 percent gross profit. If the metal rises to $2,000 an ounce, then the profit would increase to 60 percent ($1,200 in profits versus the same $800 in expenses).
But right now most gold stocks are trading at valuations reflective of gold prices in the $1,000-$1,200 range. While gold could pull back, I wouldn’t expect the decline to be so severe.
While I’ve already mentioned strategies such as covered call writing to take advantage of today’s low valuations on the mining companies, there’s a more liquid way for investors to profit from gold. In fact, one fund offers gold investments and monthly dividends. That’s perfect for investors who shy away on the grounds that gold doesn’t pay a dividend.
The Fund is the Gabelli Gold, Natural Resources & Income Trust (GGN).
As the name suggests, the fund invests primarily in gold, but also other natural resources. It employs covered-call strategies to receive income. Investors get a $0.14 dividend per share, per month. That’s a yield of 9.8 percent, more than enough to cushion investors from the volatility of investing in gold.
Investors who don’t have at least 10 percent of their net worth in precious metals (both bullion and stocks) have huge risks in today’s “easy money” economy. Holding fiat currencies amidst a flurry of new debt creation seems like the easiest way to guarantee loss of principal.
Gold stands the test of time. This time is no different.
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