Protecting Yourself From Inflation With Precious Metals... Funds?

By: Przemyslaw Radomski, CFA | Mon, Oct 19, 2009
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This essay is based on the Premium Update posted October 9th, 2009

Although some investors argue that it is deflation that is in the cards, not inflation, I believe that one should at least one step just in case the massive amount of capital that has been pumped into the sliding economy causes a deterioration in the value of the currency. This step is making sure that one's portfolio has at least one asset that will retain value should dollar's value drop significantly.

There are several options to go, and the few of the most popular are: the emerging markets, precious metals (today I would like to focus on ETF's / ETN's / mutual funds) and TIPS (Treasury Inflation Protected Securities).

Speaking of the latter, I would like to point your attention to the fact that purchasing TIPS makes sense only if you believe that the inflation numbers are correctly representing the situation in the economy. Since I have a hard time believing this (as the way the inflation is measured has been changing and is currently -- politely speaking -- suspicious), and I think many of my Readers share my doubts about the reliability of the official inflation statistics, I can't recommend purchasing TIPS.

This leaves us with the emerging markets and precious metals. The emerging markets provide an interesting way to diversify you stock holdings, but given the level of globalization in the financial markets, it is likely that any serious plunge in the US would translate into a similar development on the emerging markets as well. Therefore, as far as long-term investments are concerned, I still believe that a well-diversivied precious metals portfolio is the best way to go. Like I mentioned a few paragraphs earlier, today I would like to focus on the indirect way of owning PMs, as it is often preferred due to the convenience it involves.

I personally think the ETF's and ETN's are indeed a convenient way to trade any market. However, as far as long-term holdings are concerned (which mean that you would put a lot of money into particular fund and keep it there for a long time), I believe the default risk involved is much more important factor than it is the case with speculation. Since ETF's / ETN's "add another layer" to the risk pyramid (and by that I mean that there is one more entity between you and the place where your money is), I prefer owning stocks and especially metals directly.

However, since ETFs, ETNs, and precious metals mutual funds might still be preferable way of being in the precious metals market for many investors, I have prepared a list of the most interesting funds that you might be interested in.

Exchange Traded Funds / Exchange Traded Notes:

Mutual Funds:

In the Premium version of this essay I additionally comment on the recently introduced fund that provides you with a convenient way of owning gold in Switzerland .

While the decision as to what investment vehicle one should use is one of the most important that an investor must make, the "when?" and "at what price?" questions are vital as well. In this essay I will provide you with an analysis of the GDX ETF, which serves as a proxy for the precious metals stock sector (chart courtesy of http://stockcharts.com)

The situation in the PM stocks is similar to the situation on the silver market. We are relatively far from the previous highs, but given the recent volatility and strength of the market, it is likely that we will soon test (and then take out) both of them.

The first resistance level that I think has a high probability of stopping the current decline is at the $52.5 level. It proved to stop rallies in November 2007, April 2008, and finally in July 2008, just before the big plunge. Either way, unless anything unordinary happens, I believe that the currently rally has a big chance of taking PM stocks to the $52-$53 area, which would most likely correspond to the 70 level in the RSI.

Summing up, there are many ways to protect yourself from rising inflation / decrease in the value of the U.S. Dollar, but not all of them are really useful. One of the best ways is putting at least a part of your assets into precious metals. There are several ways to do it, and there is nothing like holding the metal in your physical possession, but if the choice is between owning them through a fund or not owning them at all, I would certainly go with the former option.

PM stocks are one of the ways to leverage your assets, and although they have on average not broken into new highs yet, it seems that it will take place sooner or later, probably before the end of this year. Since price of no asset goes straight up or down, PM stocks will need to take a breather - most likely the first stop will be made near the $52.5 level in the GDX ETF.

To make sure that you get immediate access to my thoughts on the market, including information not available publicly, I urge you to sign up for my free e-mail list. Sign up today and you'll also get free, 7-day access to the Premium Sections on my website, including valuable tools and charts dedicated to serious PM Investors and Speculators. It's free and you may unsubscribe at any time.

Thank you for reading. Have a great and profitable week!

 


 

Przemyslaw Radomski, CFA

Author: Przemyslaw Radomski, CFA

Przemyslaw Radomski, CFA
Founder, Editor-in-chief
Gold & Silver Investment & Trading Website - SunshineProfits.com

Przemyslaw Radomski

Przemyslaw Radomski, CFA (PR) is a precious metals investor and analyst who takes advantage of the emotionality on the markets, and invites you to do the same.

His company, Sunshine Profits, publishes analytical software that anyone can use in order to get an accurate and unbiased view on the current situation.

Recognizing that predicting market behavior with 100% accuracy is a problem that may never be solved, PR has changed the world of trading and investing by enabling individuals to get easy access to the level of analysis that was once available only to institutions.

High quality and profitability of analytical tools available at www.SunshineProfits.com are results of time, thorough research and testing on PR's own capital.

PR believes that the greatest potential is currently in the precious metals sector. For that reason it is his main point of interest to help you make the most of that potential.

As a CFA charterholder, Przemyslaw Radomski shares the highest standards for professional excellence and ethics for the ultimate benefit of society.

Sunshine Profits enables anyone to forecast market changes with a level of accuracy that was once only available to closed-door institutions. It provides free trial access to its best investment tools (including lists of best gold stocks and best silver stocks), proprietary gold & silver indicators, buy & sell signals, weekly newsletter, and more. Seeing is believing.

Disclaimer: All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

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