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2 Sides Of The Gold And Gold Miner Trade

Published 01/18/2017, 12:45 AM
Updated 05/14/2017, 06:45 AM

An individual's views on gold's investment merits are often as deeply entrenched as their political or religious affiliations. Curiously, there's not the same conversational taboo about discussing gold in public; indeed, it seems to be the one investment which garners constant attention regardless of what it's doing.

Just this weekend, the gentleman sitting next to me on me on a flight was quizzing me on whether he should buy more gold or wait for a pullback. Two quotes from early 20th century business titans came immediately to mind:

"The desire for gold is the most universal and deeply rooted commercial instinct of the human race." - Gerald M. Loeb, Trader and Founder of E.F. Hutton

" Gold is the most useless thing in the world. I am not interested in money but in the things of which money is merely a symbol." - Henry Ford, Industrialist and Founder of Ford Motor Company

Though you could certainly argue that Ford wasn't talking about gold per se, but rather wealth in general, it's clear that there never was nor will be a consensus on whether gold is a valid investment.

As the chart below shows, the second half of 2016 clearly favored Ford's pessimistic outlook, with the yellow metal (gold line) falling from nearly $1,300/oz to below $1,100 in December. VanEck Vectors Gold Miners (NYSE:GDX) (candles), the most popular gold miners ETF, fell in lockstep to lose nearly 40% of its value:

GDX Daily

Source: Stockcharts.com

However, so far in 2017, Gerald Loeb's view has been winning out. Gold itself has rallied nearly 7% since the December lows, while GDX has surged a full 25% to become the strongest major industry that we track!

Last month, we wrote apost titled "What gold (and gold miner) bulls need to stem the bleeding" As we noted then, the key drivers of gold and gold miners are the value of the US dollar and the level of real interest rates. The sharp drops in both of these variables over the last couple of weeks have driven SPDR Gold Shares (NYSE:GLD) and GDX skyward.

Based on the risk-off moves we're seeing today and President-Elect Trump's concerns about the value of the US dollar, the big rally in GDX could easily extend toward 26.00 or 28.00 in the coming weeks.

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