Gold: Getting Positioned for 2013

Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Tracking the investments of large institutional money managers has long been considered a tool for making one’s own decisions, although, in my view, this is where the process begins, not where it ends. It is along these lines that the $3.66 billion investment by John Paulson’s Paulson & Co. in the SPDR Gold Trust (NYSEMKT: GLD) or the 49% increase in GLD holdings by George Soros’s Soros Fund Management LLC should be considered. Against a backdrop of perpetual quantitative easing, the fiscal cliff and continued weakness in Europe, gold looks well positioned to add to its twelve year march higher into 2013.

The Projections

In a recent Bloomberg article, a compilation of 16 analyst estimates revealed an expected average price of $1925 per ounce in the fourth quarter of 2013; the figure is based on the median figure taken from the gathered data. That price represents an approximate 11% rise from current levels, although half of those analysts saw the price as being higher. The $2000 level should also be viewed as a critical psychological barrier beyond which a significant price spike is clearly possible.

Gold’s all-time high of $1921.15 was reached in September of 2011. In my view if gold is able to break this level, running to $2000 will be a near guarantee. These levels appear to be exactly where gold prices are headed.

Global Factors

Current macroeconomic conditions seem to be combining into a near “perfect storm” to drive gold prices higher. With the Federal Reserve pursuing a course of perpetual QE that pumps $40 billion a month into the economy, inflation has become an eventuality rather than a question. This action is tied to the abandonment of the Fed’s dual mandate to manage inflation and unemployment, with the new focus being solely on the labor market. The move is also likely driven by the fact that the only way to tackle the ballooning debt is to inflate our way out of it.

Inflation driven by the Fed can be coupled with the looming fiscal cliff to make U.S. issues front-and-center in the global macro maelstrom. The series of automatic tax hikes and spending cuts that are set to begin early next year have economists convinced that, barring a resolution, a new recession is on the horizon. During periods of recession, gold is seen as both a safe haven and a superior store of wealth.

Finally, the debt crisis in Europe appears no closer to a lasting resolution and world central banks are all scrambling to react to the situation. When these factors are coupled with inflation, the most appealing reasons to buy gold are all in play. It's no wonder that major players like Paulson and Soros are shifting heavily into the asset.

Market Bifurcation

It is important to make a distinction between the expected price action of gold and of the stocks of gold mining companies. While both tend to perform well during inflationary periods, miners like Barrick Gold (NYSE: ABX), Newmont Mining (NYSE: NEM) and Goldcorp (NYSE: GG) significantly lag the commodity. This is driven by the reality that these companies face the same economic pressures on their operations as other businesses. The current conditions, therefore, are likely to exert competing forces on these stocks. There are trades that can be designed around this disconnect, but they are more complex than the buy and hold approach taken by Paulson and Soros on gold.

The Trade

Given both the strong position of gold heading into 2013 and the disconnect between the commodity and the miners, the most direct play is to invest in GLD. The ETF offers a low-cost vehicle through which to get gold exposure and should do well moving forward. At the end of the day, there is worse company than Paulson and Soros for your investment dollars.

Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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