Golden Rule: Looking for Profits in All the Right Places

As a commodities trader for over 20 years, I have seen markets come and go. What’s hot this month can often become what’s not hot the next.

One of the best skills a commodity trader can acquire is to be able to pick out the markets that are on the cusp of breaking out, and then get out of those markets before they fizzle. In the last few years, this ability has become even more difficult with the onset of electronic trading and myriad new commodity contracts, ETFs and hedge funds.

Even so, some of the markets that have been around since futures contracts began are still the most viable and ultimately profitable. One of those markets is the precious metals, especially gold.

The Changing Face of Gold

Late in 2006, I was visiting friends on the floor of the New York Mercantile Exchange silver pit. That day they were launching the electronic version of the gold and silver futures on the exchange. Since then, the electronic markets have virtually taken over and dried up liquidity in the open outcry trading pits. This isn’t because interest in the gold markets has waned; in fact, it’s the exact opposite. The reason is because interest has increased exponentially and the electronic markets make it even more attractive to a much broader segment of global investors.

Another major occurrence for gold’s growth has been the emergence of gold ETFs. These investment vehicles have allowed investors of all backgrounds to buy physical gold with the same ease with which they’d buy a mutual fund. It’s fair to say that with these new investment methods, gold has become even more attractive as money.

Gold as Money

I have established accounts in my second home country of Estonia with a company that handles so-called e-gold. By using gold credits, I am able to make transactions and accept payments just as I would with paper currency, but without the rate risk and exchange costs. Other companies, such as, offer traders easy access to the physical metal without the worry of holding or storing it.

Lately, many investors are asking themselves the question is gold a buy-and-sell investment or a buy-and-hold for the long term? This very question may have been answered during the recent collapse of the markets. ETF trading was volatile, to say the least, but if we really look at what happened, there was no widespread sell-off of gold holdings in the ETFs. That would seem to indicate that a very large percentage of investors are using them as part of a buy-and-hold strategy. I see a very strong future for gold ETFs, and they’re likely to continue to grow and drain gold supplies from the world market.

The recent pullback in gold was quickly made up as the broader market recovered, and that is a clear indication that the yellow metal may well be on the upswing of a new bull market. The ongoing international tensions with countries like Iran are also helping to support the price of gold.

One of the most important things for an investor these days is to be well diversified. A diversified asset base is key to long-term growth, period. And having a diverse portfolio means that it includes precious metals.

In my opinion, at the end of the day, gold will end up doing what it’s always been known to do — gain in value over the longer term.

Now that much of the fear about the yen carry trade and housing implosion is figured into the market, the long-term outlook for gold is shining bright.

Kevin Kerr

March 28, 2007

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