One Strategy to Profit from Gold Bullion Prices, No Capital Required
Gold bullion prices have taken a beating; since the beginning of the year, they have declined about 20%, and the pessimism towards the precious metal continues to increase. Investors are fleeing from gold bullion and selling at a very high pace. As EPFR Global (a firm specializing in tracking inflows and outflows of money) notes, money managers are withdrawing their investments from funds that invest in the precious metal at the highest rate since 2000—withdrawals have amounted to $20.8 billion since the beginning of the year. (Source: Campbell, E., “Gold Bears Pull $20.8 Billion as BlackRock Says Buy: Commodities,” Bloomberg, May 13, 2013.)
The reason behind the price decline is that there is no use for gold bullion anymore. The shiny metal is used in times of uncertainty as a safe haven, and now economic conditions are much better. To say the very least, uncertainty isn’t there as it was back when the financial crisis struck the U.S. economy—depression was becoming a very likely scenario, with staggering unemployment, failing banks, and the financial crisis on the cusp of collapse.
On top off all this, the inflation isn’t picking up as it was expected. The Bureau of Labor Statistics reported the Producer Price Index (PPI)—an early indicator of inflation—has been posting a negative performance for two months. It registered a decline of 0.6% in March and 0.7% in April. (Source: “Databases, Tables & Calculators by Subject,” U.S. Bureau of Labor Statistics web site, last accessed May 17, 2013.) Remember: gold is considered a good hedge against inflation.
With this, investors are asking how low can the metal prices really go, and if they should start buying.
We still have some problems that need to be solved, both in the U.S. and the global economy, so uncertainty hasn’t completely diminished. In addition, it seems there is still significant demand for the metal. To give you some idea, when gold bullion prices declined, retail investors across the globe ran to buy; mints had to work overtime to keep up with the demand.
Sadly, sometimes momentum is strong and it drives markets lower; but with gold prices, it seems to be the same. After the two-day slump in April, which took the price of the yellow metal to as low as $1,320, gold bullion prices stabilized and increased a bit, but the bears still remain in power.
The best strategy for a gold bullion investor as the price continues to decline would be to follow the well-known senior miners—those that can take metal out of the ground at a very low cost. Investors may want to put big names, such as Goldcorp Inc (NYSE/GG; TSX/G), Newmont Mining Corporation (NYSE/NEM), Barrick Gold Corporation (NYSE/ABX; TSX/ABX), and AngloGold Ashanti Limited (NYSE/AU). (Note: these are not recommendations to buy.)
Why? If the gold bullion prices start to climb, these senior miners will be able to profit the most, due to their ability to take the metal out of the ground for cheap. Gold miners provide leverage to investors as gold bullion prices increase. Consider this: if gold bullion goes from $1,400 an ounce to $1,600 an ounce, it only represents an increase of a little more than 14%. Now, if a gold miner can take gold bullion out of the ground at an all-in cost of $1,250 and the price of the metal is $1,600, the company’s profits will be 28% and the market will price it accordingly.
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