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Precious Metals Are Rising But Won't Skyrocket

09/21/11 09:04:38 AM
by Billy Williams

There is a game-changer taking place right now that will have far-reaching effects on everything you buy, sell, or invest in and you can get left behind if you don't understand what markets are going to benefit from it.

Security:   RGLD, DGP, SLW
Position:   Buy

Gold has been on a remarkable run lately and is forecasted to continue to rise along with other hard resources for the foreseeable future due to rising inflation and investor flight to safety. However, despite the vast printing of fiat currency in the US and abroad, there is good news and bad news for those of you who follow gold and other precious metals.

The good news is that precious metals and particularly gold will continue to rise steadily for at least the next six months and probably well into next year (see Figure 1). This is because governments and banks around the world need to get their financial houses in order and investors are nervously fleeing traditional investments such as stocks and bonds because of the rising uncertainty. In fact, Spain quietly instituted a new tax on wealthy Spaniards that they hope will raise an additional one billion euros to help the country remain solvent.

FIGURE 1: DGP. The gold ETF has been moving almost in tandem with gold itself, making it an attractive investment vehicle for both small and large investors who want to capitalize on gold's bull market.
Graphic provided by:
According to news sources, the Spaniard Finance Ministry stated on Friday, September 16, 2011, that "the economic crisis makes it necessary to bring this tax back, applying principles of fairness so that those with bigger assets can be taxed and so those who have greater wealth can contribute more to getting the country out of the crisis."

This all contributes to a flight to safety as the flow of capital moves away from equities and into short-term US Treasury notes and gold as a hedge against loss of purchasing power.

FIGURE 2: FNV. FNV is a gold royalty stock that has special licensing agreements that allow it to buy gold for less than its current cost and distribute those earnings into steady dividends. FNV's share price has appreciated due to its exposure to the gold bull market.
Graphic provided by:
The bad news is that Germany has surrendered on devaluing the euro. Now, this is not "bad news" as in the sense that you are going to lose money, because devaluing the euro gives its members some breathing room to pay off their own debts and meet their entitlements. The Germans, who control the euro for the European Union, were protective of the euro's strength as a currency as much as their own and were extremely reluctant to devalue it, but the only way that the individual European countries can hope to get control of their debt problems is by devaluing their currencies so that they have more francs, pounds, liras, or so forth to pay off their debts.

However, by printing more money, they risk inflation, which is bad news for the common man who works for a living and tries to keep bread on the table, because that bread is going to slowly creep up in price over time, which is another reason why gold remains a safe holder of value and rises in the face of inflation growth.

FIGURE 3: SLW. SLW is a silver royalty company that has benefited from the rise in precious metals and is currently consolidating along its 200-day simple moving average (SMA) to possibly resume its uptrend.
Graphic provided by:
In the end, the EU has managed to stave off a breakup of its union and, as a result, gold will not skyrocket, nor will the other precious metals such as silver or palladium or any other metal. But gold has the potential to gain 25% or better during the next six to 12 months.

If holding physical gold is not something within your means at the moment, you could consider any of the gold or silver royalty companies (Figures 2 and 3), exchange traded funds (ETFs), or mining stocks with exposure to its bullish trend and are likely to get swept up in its rising price, offering you the chance to profit indirectly through any of these available options.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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