The Global Bull Bets on the Yellow Metal

Nicholas Vardy

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

One of the few assets that has been on an upward trend is gold, which now has outperformed all major global stock markets over the last 12 months. This week’s Global Bull Market Alert recommends that you take a position in the yellow metal through the SPDR Gold Shares (GLD).

With gold creeping into mainstream headlines, it almost seems redundant to review the investment case for what the English economist John Maynard Keynes called the “barbarous relic.” But here it goes, anyway…

The price of gold has several powerful drivers pushing it upward. The risks of near-term deflation and longer-term inflation, coupled with massive U.S. budget deficits and crushing sovereign debt burdens in Western Europe, have made gold the ultimate safe haven asset. An increasing number of worried investors are buying gold as a hedge against a full-scale financial crisis and currency debasement.

And interest is expanding beyond the traditional realm of gloom-and-doom “gold bugs.” Central banks also have been adding to their gold holdings to diversify their foreign reserves at an accelerating pace. Russia’s central bank has added more than 26 metric tons to its reserves in the first quarter of 2010. The Philippines has boosted its gold reserves by about 10 metric tons. Both China and Saudi Arabia are widely believed to be quietly adding large quantities of gold to their vaults.

Then there is that pesky issue of the law that even an interventionist Obama administration can’t supersede: “the law of supply and demand.” Gold production is set to decline this year and in 2011. Meanwhile, investment demand has never been stronger. That means higher prices. No wonder that “smart money” like hedge funds and big insurance companies have been adding gold to their investment coffers.

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Finally, we are entering a season that has been kind to the gold price. Gold has risen an average of 11.3% between summer and year-end in eight of the past nine years. Over a longer time frame, average gold price rises from June-July to December has been 7.5% over the past 39 years. Should the price rise this year by the nine-year average, gold would end the year at just under $1,500 — in line with a number of recent mainstream (i.e. non-gold bug) predictions.

So buy the SPDR Gold Shares (GLD) at market today, and set your initial stop at $115.00. If you want to play the options, I recommend the December $127 call options (GLD101218C00127000).

Portfolio Update

iShares MSCI Chile Investable Mkt Idx (ECH) ended the week slightly lower as global markets consolidated their gains. As one of the strongest relative performers in global markets, Chile remains a BUY. Tighten your stop to $53.50.

UltraShort Euro ProShares (EUO) was flat this week. Despite French investment bank BNP revising its mid-term EUR/USD forecast to 0.98 — below parity — in light of the euro’s recent rally, I am keeping EUO at a HOLD. Tighten your stop to $24.00.

iShares FTSE/Xinhua China 25 Index (FXI) rose slightly this past week — though it traded off of its mid-week highs. Although I believe the Chinese market will lead global stock markets down, I am keeping this bet against China at a short-term HOLD.

CurrencyShares Japanese Yen Trust (FXY) rose 1.68% this past week as the yen maintained its trend. As long as global markets remain edgy, this low volatility position remains a defensive BUY. Tighten your stop to $109.00.

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Market Vectors Indonesia ETF (IDX) rose slightly this week, and again is trading near record highs. If it breaks through this level, it will be good news. But for now, it is better to be safe than sorry. I am moving this position to a temporary HOLD. Raise your stop to a tight $73.00.

PowerShares DB US Dollar Index Bullish ETF (UUP) traded lower this week. With the “greenback” a safe haven during uncertain times, UUP remains a defensive BUY. Raise your stop to $24.00.

P.S. If you want to keep up with my latest insights on developments in fast-paced global markets, you can now follow me on Twitter on @NickVardy or on my new blog, NickVardy.com.

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The big news in global markets this week was the Chinese government's announcement that it may begin to re-value the yuan against the U.S. dollar.

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