In 2004, the launch of the SPDR Gold Trust (NYSEARCA: GLD) leveled the playing field of gold investing by allowing for a less expensive option than buying the physical metal. I use this investment vehicle as a supplement to my physical holdings when I feel gold’s price is set to rise. I just increased my position based on this. In the following sections, I make the case its time to buy the GLD.
Yellen’s dovish stance
Fed Chair Janet Yellen’s testimony was highly favorable for gold. While she repeats past remarks about recent low inflation readings being transitory, she says there’s “uncertainty” about how inflation will respond to reduced slack in the economy. Yellen stated:
“Of course, considerable uncertainty always attends the economic outlook. There is, for example, uncertainty about when – and how much – inflation will respond to tightening resource utilization. Possible changes in fiscal and other government policies here in the United States represent another source of uncertainty.”
Yellen went on to say the Fed Funds rate won’t have to rise much further to get to a neutral policy stance, though factors currently holding down the neutral rate are likely to diminish over time. These were all very bullish statements for gold and the precious metals in general.
What’s more, this leaves the door open for inflation to spike even higher in the coming years. Basically, the Fed would rather fight off rising inflation in the future than be blamed for crashing the markets now. Fortunately, the GLD provides an ideal hedge. Furthermore, any negative exogenous geo-political event could send GLD shares soaring.
Hedge against market crash
Gold has always been seen as a safe haven play in times of market turmoil. I like to hedge my portfolio by allocating anywhere from 5% to 10% of my portfolio in the precious metals using the GLD and the iShares Silver Trust ETF (NYSEARCA: SLV) for silver.
Technical status – Something has got to give
The GLD is sitting just above support at the $114 mark at present.
The GLD is down nearly 4% in just the last month. Nevertheless, a renewed rally in the GLD may be driven by the persistent weakness in the US dollar.
Both the GLD and the U.S dollar have shown weakness over the last few months. Normally, if the dollar drops the GLD and gold rises. So far this hasn’t been the case. Nevertheless, we expect the GLD to rally at some point based on the dogged weakness in the dollar.
The Bottom Line
The markets are trading at all-time highs just as uncertainty regarding inflation and geopolitical risk have spiked. Market participants have been lulled into a false sense of security over the last few years. Complacency seems to rule the day. Market participants have been desensitized to ever increasing terror attacks and vicious political vitriol. The Fed has acted as a put on the market, keeping volatility levels at all-time lows. Well, we believe that worm is about to turn.
Now is the time to buy the GLD as a hedge against inflation and/or a negative geopolitical event causing a major market selloff. I typically hold approximately 5% of my portfolio in precious metals. In times like these, it helps me to sleep a little better at night. I would never hope for something bad to happen. Yet, as Ben Franklin stated so eloquently:
“By failing to prepare, you are preparing to fail.”
Those are my thoughts on the matter. I look forward to reading yours. Please use this information as a starting point for your own due diligence and always consult a financial adviser prior to making any investment decisions.
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Disclosure: I am/we are long GLD, SLV.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.