Bailout = Inflation: Gold Should Shine

By Jerry Slusiewicz | September 24, 2008 | 7:15 PM | 4 Comments

Treasury Secretary Hank Paulson should have heeded the words of Al Capone who said, "You can get much further with a kind word and a gun than you can with a kind word," when he addressed Congress this week.  How we got here is not going to be debated in this article.  Wanting or not desiring the bailout is not today's topic either.  What is important is what course of action should you take with your investment portfolio should this bill pass in almost any format if it is finalized.

This $700 billion on top of all the other previous commitments made by our leaders is likely to top $2 trillion.  Another greenfaucet contributor John Lee did an excellent job laying out the total cost in his recent article.  The bottom line the US government intends to fire up the printing press is a desperate attempt to inflate our way out of this deflationary spiral that we have been in over the last several months.

One of the best investments to capitalize on inflation is to own gold.  Gold is also a solid investment when fear is running rampant.  They are several ways to invest in the currency of kings, but the most efficient modern way is to own an Exchange Traded Fund that tracks the price of gold bullion.  There are currently two ETF's to choose from. 

The first is the SPDR Gold Shares (NYSE:GLD).  The value of the bullion backing the GLD fund is almost $21 billion.  You can go to their website www.spdrgoldshares.com/sites/us to see photos and obtain more information.  I prefer the GLD because of the liquidity is much higher (approximately 18 million shares traded per day), and they were the first to bring this product to market back in November of 2004.

The alternative is the iShares Comex Gold Trust (NYSE:IAU).  This is a smaller fund, with less average trading volume (read liquidity).  The expense ratio on both funds is the same 0.40%.  Both funds track the average daily price of gold bullion, less expenses.

Another inflation hedge is to use the gold mining ETF, the Market Vectors Gold Miners (NYSE:GDX).  Van Eck is the maker of this fund and it is a collection of mining stocks that reflect the value of the Amex Gold Miners Index, less fees and expenses, which are 0.55%.  This is a very liquid fund averaging almost 5 million shares a day traded.  The risk you run here is that the price of gold bullion skyrockets and the mining companies, due to a variety of real world labor, and contractual agreements stagnates as has happened in the past year where the bullion ETF"s (IAU & GLD) are up approximately 23%, and the Miners (GDX) is up only 1.73% over the same time.

A risk to the whole trade even though I think the RTC bill will pass, create  inflation and result in rising gold prices.  A significant portion of the aggregate world gold holdings is owned by governments, central banks and related institutions. If one or more of these institutions decides to sell in amounts large enough to cause a decline in world gold prices, the price of the shares of all three of these investments will be adversely affected.

Well I did what I could... Figured I could try and make a difference so I sent a letter of protest to my congressional rep., Sam Farr of the CA 17th... Submitted by Bulleri on Thu, 2008/09/25 - 2:15pm » reply |

Gold vs Silver Can't argue with you on the comment that silver has more industrial uses than gold. However, I have been invested in a Precious Metal (PM) mutual fund that holds both gold and silver for diversification. The fund is up 135% since 2002. The silver provides added diversification that gold does not provide on its own. September 27th is the last day of this calendar year that ECB banks are allowed to sell some of their gold reserves. Physical demand for both gold and silver has spiked dramatically since the US Govt-induced selloff over the past two months , resulting in serious shortages. Gold dealers are charging hefty premiums over spot prices as physical orders are difficult to fill. Good luck. Chris Submitted by Chris (not verified) on Thu, 2008/09/25 - 10:11am » reply |

Why? Silver trades more for it's uses for industrial purposes than its monetary value. Stick to the gold. Submitted by Jerry Slusiewicz on Wed, 2008/09/24 - 11:49pm » reply |

Silver? How about silver Jerry? Do you think this would be a good place to be as well? How about SLV? I heard its rather illiquid though... Submitted by Bulleri on Wed, 2008/09/24 - 11:09pm » reply |