A Golden Boost to Your Defensive Portfolio

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

This week’s Global Bull Market Alert recommendation — Canada’s Yamana Gold Inc. (AUY) is a bet on the continuation of the bull market in gold. As a gold company involved in exploration and mining of gold in Brazil and Argentina, Yamana Gold is my #1 pick to play gold during this period of turmoil in global markets.

First, let’s look at gold itself. Investors turn to gold when the stock and bond markets are wracked with uncertainty. Everything that is bearish for stocks — political instability, inflationary fears and a falling dollar — tends to be bullish for the yellow metal. Since mid-August, when the credit squeeze first hit, the spot gold price shot up from around $658 to a peak of $923.40 on Friday. No wonder pundits are predicting gold will hit $1,000 an ounce by early 2008.

Then there is the issue of dwindling supply. The world’s gold miners simply cannot find enough ore to replace the globe’s fast-depleting reserves. As the chief executive of a large gold miner recently noted: “There’s not much gold out there… Global mine supply is going to decrease at a much faster rate than people generally believe. Many of the new mines that people are anticipating will never come into production.” 

At the same time that production is peaking, demand for gold is exploding. According to the World Gold Council, demand for gold rose 19% in the third quarter to hit a record $20.7 billion. Demand for gold by exchange-traded funds (ETFs) and similar financial products jumped a whopping sevenfold from 19 tons to 138 tons as investors increased investments in gold as a safe haven.

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Everyone from Citigroup to market guru Marc Faber is predicting $1,000 an ounce gold within the next few months. Remember that gold would have to trade at close $2,500 an ounce to equal the 1980 record in inflation-adjusted terms. And recent research by RBC suggests that at $1,000 an ounce, the share prices of the world’s major gold mines — could jump by between 65% and 100%. Yamana Gold could do even better. Its recent financial results have been nothing short of spectacular. Earnings over the past three quarters grew by 1,200%, 340%, and 900%, respectively.

So buy Yamana Gold (AUY) at market today and place your stop at $11.00. If you want to play the options, I’d recommend the April $15 calls (AUYDC.X). You can expect this to be a volatile play — both on the upside and the downside.

PORTFOLIO UPDATE

With Hong Kong down 4.25% and Shanghai down 7.19% overnight, look for your position in UltraShort FTSE/Xinhua China 25 Proshare (FXP) to soar today — perhaps even by double-digit percentages.

The performance of our defensive portfolio held steady in the face of global turmoil last week. We were, however, stopped out of Spain’s Telefonica (TEF) for a loss.

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The volatility of global markets over the past week has been one for the record books. After global markets sold off hard and fast across the board on Monday and Tuesday, most of them -- particularly in Asia -- snapped back like a rubber band in overnight trading after the Fed's surprise rate cut.

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