The Best Insurance Policy

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I always have a watchful eye on a number of exchange traded funds (ETFs) to help me slice and dice the market's latest moves. There is one trend that investors simply can't ignore.

That trend is increasing gold prices.


There are a lot of gold bugs out there that are constantly pounding the table. They say gold is the ultimate inflation hedge, that it is a safe haven asset, and that it is extremely undervalued right now by historical measures.

Kevin McElroy, editor of The Resource Prospector (another Wyatt Investment Research free daily letter) is one of them. He's always writing about how investors should be buying physical gold, and he'll occasionally even recommend sources that he buys through. While he's always clear to point out that he doesn't have any affiliation with his sources, or receive any benefits by recommending them, he is just as clear to point out that to not own gold is crazy.

In fact, Kevin just wrote about gold yesterday:

"I want to remind everyone that gold and silver are not an investment by any classic definition of the word. They produce no cash, or rent like a business, and they don't grow in size or value like a plot of timberland. They certainly experiences price fluctuations, but so does every other asset.

Precious metal is a store of value as well as a medium of exchange, to a lesser degree. In the event of a currency crisis, it will revert to its use as a medium of exchange.

So that's why I buy physical gold and silver. Your reasons might be different, and you need to think about your specific situation, as well as how you might store the metal once it arrives. In any event, if you do decide to take physical delivery and store it in your home, I'd recommend only telling one other person."

Even though Kevin has broken his rule by telling the thousands of readers that get his letter every day that he owns physical gold, I tend to agree with him that owning physical precious metals is a great way to have your own insurance policy.

If you want to buy the physical stuff, this is what Kevin has to say:

"I recommend buying coins from reputable dealers like Kitco.com and blanchardonline.com - and while I've bought bullion from both vendors, and I consider the representatives from these companies to be knowledgeable, fair and generous, they also happen to be salesmen. If you call to buy gold and silver bullion from these salesmen and you don't know what you want, you probably won't get the coins that are right for you...

...My personal favorite small-denomination gold coin is the British Sovereign. It's arguably the most recognized gold coin in world history, having been first minted in the 15 th Century, and it's still minted today - though you'll pay a premium for newly minted "proof" coins from the Royal Mint..".

As I've said before, Kevin is the kind of guy that I think (although he won't admit it) stuffs his mattress with the golden metal. You know how you keep hearing stories like how some widow sold an armoire that her husband had stashed hidden bars of gold in?

That's Kevin, and I'm quite certain his wife probably doesn't know where all his money goes. But she would, if she stopped to think about it, notice that their mattress seems to be getting more and more firm with each passing month.

For my part I'm not as cozy with gold as Kevin is, but we both agree that to not have exposure to gold in your portfolio is crazy. However, my favorite way to get that exposure is not by buying the physical metal, but buying small cap mining stocks instead - more on this in a minute.

***Gold is now trading at $1230 an ounce, and it's trending higher as you read this article. Take a look at the two-year chart of the continuous contract for gold - it pulled back in June and July, but it is still trading above both its 50 and 200 day moving averages, and RSI is in a nice upward channel.


***So how do we profit from this trend as small cap investors? Junior and mid-tier gold miners are the best way to play the strength in gold, because as the price of gold increases, their profit margins increase. It's pretty simple - so long as fixed costs stay constant.

That last caveat is what small cap investors need to be careful about. It's been said that CEOs of gold mining companies are just liars standing next to holes in the ground. Since 'proven and probable' reserves can be open to interpretation, we only want to invest in those companies that are actually pulling gold out of the ground. And those that keep a tight lid on expenses.

***So why did I mention ETFs earlier? Because there are gold ETFs, and one that you should be keeping an eye on is SPDR Gold Trust ( GLD ) , which tracks gold bullion. This ETF has surged over the last month and has outperformed the market in 2010. Year to date the GLD is up 12.2 percent while the S&P 500 is down 5.7 percent.

Now, you can go out and buy the GLD to get exposure to the sector, but you're unlikely to make the same huge percent gains that are possible with individual junior and mid-tier miners.

To do that you need to buy small-cap mining stocks.

***I own a junior gold miner in the Small Cap Investor PRO portfolio. The company announced its outlook for fiscal 2011 and expects to pull 70,000 ounces of gold from the hills of Mexico. And looking at gold prices, that translates to a bundle of cash.

In the last quarter of 2010, this company increased its gold production by 40 percent at its mining site in Mexico. And as the price of gold goes up, its margins expand. And the more gold it pulls from the ground - well you get the picture.

Earlier this year, the stock was featured in the Dick Davis Digest , Wall Street has already begun to take notice. But it's not too late to pick up shares. You can get my full research report here.

***There are a lot of small cap gold mining companies out there, but many CEO's are just liars standing next to holes in the ground. You need to be investing in small-cap companies that are actually producing, and that are profitable. The company I've found is both.

I can't tell you what company I've found - you'll have to sign up for a trial subscription to Small Cap Investor PRO by clicking here for that.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.




This article appears in: Investing , Stocks

Referenced Stocks: GLD

Wyatt Investment Research

Wyatt Investment Research

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