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Invest With An Edge

Gold Bugs Unite: IAU

The market faltered on Tuesday as Barack Obama was sworn in as the 44th President of the United States. As the nation observed the historic inauguration, the new President provided a glimpse on how he would address the lingering economic issues.

“The state of the economy calls for action, bold and swift, and we will act – not only to create new jobs, but to lay a new foundation for growth. We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together.”

Much like the outgoing President, this new President wants to combat the economic crisis with more government financing. Instead of shutting down the printing presses, Obama is ready to continue the Bush/Paulson borrow-and-spend policy in an attempt to stabilize the economy. Congress is already committed to an additional $825 billion in bailout money. Obama is ready to sign the check. In many ways, not much has changed in Washington in the past few days. As an investor, what does that mean to you?

Welcome to Invest With An Edge 101. Class, what happens when the government borrows more money than it has and puts it into the economy? Anyone, anyone? Yes, Johnny, you’re right – inflation. And what happens when there’s inflation? That’s right, Jane – hard assets like gold and other precious metals go up.

Once banks stop hoarding the extra Fed & Treasury cash, they will start lending again. The more cash in circulation, the more inflation is likely. And even if we don’t get inflation, deflation is also positive for gold. Analysts one day will seem more likely to talk about gold’s $1000 support versus the $1000 resistance we’re currently experiencing.

The market is in the throes of another downturn. Yesterday, the S&P and Dow took out the December 1 lows. Today, the indexes re-captured much of the decline. And still, gold continues to exhibit relative strength versus the market. Unlike a few months ago, gold has stabilized as the market has weakened. It’s even in a short-term uptrend. If it closes above $880, we expect it to move much higher – and soon.

An easy way to quickly gain gold exposure is through iShares COMEX Gold Trust (IAU). IAU is a pure gold play. Instead of similar ETFs that hold mining shares and silver bars, Barclay’s iShares created IAU to mirror the price of gold as closely as possible. A few other ETFs could work just as well, but IAU has a generous volume and nearly $2 billion in underlying assets.

All that said, timing a gold trade is notoriously difficult. You could be completely right about the fundamentals, the chart, and everything else, but still wait for years for the trade to work out. We don’t expect that sort of delay this time around, but we offer the caveat from our experience. To grab an asset worth keeping, go with IAU.All the best.

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