I’ve recently become quite bullish of Gold again and to put this strategy into action I’ve decided to buy the COMEX Gold Bullion Bull Plus ETF offered by BetaPro (Ticker HBU on the TSX). These ETFs offer 200% of the daily return (positive and negative) of the COMEX Gold Bullion Index which simply tracks the performance of gold. So, if the price of gold is up 3% on the day, you would expect the HBU ETF to be up 6%. Conversely, if gold is down 3%, then the HBU ETF would be down 6%.

BetaPro offers a number of different ETF, all with very low fees (the HBU ETF has a 1.15% annual management fee attached to it). Their ETFs cover a wide range of indices and commodities: the TSX Index, Crude Oil, Agricultural Grains, S&P 500 Index, TSX Financials Index,… the list goes on. BetaPro also offers ETFs for those with a little more bearish outlook on things as well. For every bull ETF offered, BetaPro offers a bear counterpart. The counterpart to the HBU ETF is the HBD ETF which offers 200% of gold’s negative performance (i.e., it goes up when gold declines).

These ETFs offer every day investors a great way to invest in some of the more difficult to access investment classes, without having to dabble in futures or options.

Anyway, on to the topic of gold. Like nearly all commodities, gold has seen stellar performance over the past few years, advancing nearly 120% since the beginning of 2005… so you may be wondering how on earth I could become bullish at this point – below are my reasons:

1. Inflation: Gold has always been a good hedge against inflation. When prices around the world are rising, so too do gold prices. One simply has to take a trip to the local gas station, or grocery store to see if we’re in inflationary times. Commodity prices are soaring and their effects wont be contained to the products derived from these commodities (i.e., gasoline, food, plastics), their effects will impact the prices for nearly everything.
2. Interest Rates: The US has been aggressively cutting their overnight rate since last fall. Many have now started to call for an end to rate cutting given that inflation concerns have heightened recently, however it remains unlikely the Fed will start increasing rates given the state of the US economy. The Fed tends to have a lot of inertia, meaning they stick with one strategy far longer than most people anticipate… and probably far longer than they should. I would expect the Fed to hold rates constant for far longer than most people are expecting, which can only lead to more inflationary pressures and a lower US Dollar.
3. US Dollar: The US greenback has been under tremendous pressure and the long term trend remains downward. The pressure is due to the poor state of the US economy, low US interest rates relative to the rest of the world, and a continuing trend for central banks around the world to offload their US dollar reserves in favour of holding the EURO. Aside from the direct impact a weakend US Dollar will have on gold (most gold futures are priced in US Dollars), the indirect impact stems from the fact that institutional investors begin to prefer holding gold over US dollars as their safety asset.
4. Good Technicals: I’m no expert on technical analysis (I would look at Bullish Dividend's Introduction To Technical Analysis for more info), but consolidation phases usually end with a break to the upside or downside. The chart below shows the price of gold going back to the beginning of ’05. We’ve seen a few well defined consolidation phases since then and each time gold has appreciated substantially after breaking out of the consolidation. Given that gold appears to be breaking out of another consolidation phase again, I would expect a material move higher.

I purchased the HBU units at $18.84 on June 18 when gold closed at $894.35. As I write this article gold is now trading at $942.38 and the HBU units are at $21.06 – a return of nearly 12%.

Recommendation: Buy gold in the short- to medium-term. This isn’t a long-term investment given that gold isn’t a value story. Accordingly, I would sell on any pull back below $850.

Ownership Disclosure: I currently own shares of the COMEX Gold Bullion Bull Plus ETF (HBU).

Disclaimer: Any information contained in the above article represents my opinions only, and should not be construed as personalized investment advice. I cannot assess, verify or guarantee the suitability of any particular investment to any particular situation and the reader of the article bears complete responsibility for its own investment research and should seek the advice of a qualified investment professional that provides individualized advice prior to making any investment decisions. All opinions expressed and information and data provided therein are subject to change without notice.