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Pure Play Leveraged Gold Trade

GuruFocus.com

- By Jonathan Poland

I don't look at commodities very often as they are really just bets on direction not real investments, but with the Dow Jones closing in on 22,000, I see more expensive stocks and more uncertainty. The gold trade is becoming more compelling.

With this trade, you have to ask the question: How likely is it that a stock market correction will lead to a spike in gold prices?


In 2008, gold was just hitting its own bull market, having risen from $250 an ounce to over $900 an ounce the September before the crash, which sent gold down with it. A few years later in 2011, gold closed in on $1,900 an ounce, and now almost nine years on the price sits at $1,240 an ounce.

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Gold only lost 16% of its value in 2009, rallying 250% in three years while the Standard & Poor's 500 came back just 72% after its value was virtually cut in half. So, by recent logic alone, if a market correction is imminent, gold seems like a great option with at least a portion of your money.

With that in mind, the SPDR Gold Trust ETF (GLD) is the first and possibly best way to trade gold without owning it. It is trading just over $118 per share and tracks the price to a tee and provides the liquidity of a stock. John Paulson (Trades, Portfolio) still owns over 4.3 million shares, about 7% of his total assets.

If you're in the Peter Schiff camp, agreeing that our currency is overvalued and that the dollar will fall soon, then it could be worth taking a leveraged trade on gold.

The stock with direct exposure would be VelocityShares 3x Long Gold ETN (UGLD), which gives you 300% of the return on the S&P Gold Index, a reliable and publicly available benchmark tracking the COMEX gold future.

There's is also the Direxion Daily Junior Gold Miners Bull 3X Shares (JNUG), which seeks a return that is 300% of the return of their benchmark index for a single day. The companies in the ETF are all miners, including the following:

(weighting)

  • Pan American Silver Corp. (PAAS) 4.26%.

  • Gold Fields Ltd. (GFI) 3.86%.

  • Tahoe Resources Inc. (TAHO) 3.69%.

  • Evolution Mining Ltd. (EVN) 3.58%.

  • Yamana Gold Inc. (AUY) 3.42%.

  • Iamgold Corp. (IAG) 3.28%.

  • New Gold Inc. (NGD) 3.21%.

  • Centamin PLC (CEY) 3.19%.

  • Northern Star Resources Ltd. (NST) 3.10%.

  • Sibanye Gold Ltd. (SBGL) 3.04%.



Will the miners as a group do better than the overall price of gold? I'm not 100% convinced, yet if you're going to be long gold, it might make sense to do VelocityShares and Direxion. This way, you have exposure in both areas, the price itself and smaller companies that could benefit from gold prices.

Disclosure: I have no positions in any of the stocks mentioned in this ariticle.

This article first appeared on GuruFocus.