March 17, 2008 (Investor's Business Daily delivered by Newstex)--Both StreetTracks Gold Shares GLD and iShares Comex Gold Trust IAU climbed almost 3% to all-time highs last week in heavy volume as gold reached the symbolic $1,000 an ounce. The two ETFs vaulted 53% in the past 12 months and 20% year to date.
Why? Inflation is rising. For all of 2007, consumer inflation spiked 4.1% -- the biggest rise in 17 years. The dollar and interest rates are falling. An expected rate cut of at least 0.75% at the upcoming March 18 Fed meeting will further reduce investor appetite for bonds and money markets.
"In that case, investors will want to own hard assets over paper assets," said Tom Winmill, manager of $280 million Midas Fund (MIDSX). "I don't think we have ever been as bullish as we are now on hard assets including copper, aluminum, platinum and silver and the companies that mine those metals."
History shows the exuberance is still far from irrational. In 1980, gold reached a high of $847 an ounce, which would be worth $2,170 in today's dollars.
Gold Miners Shine
Market Vectors Gold Miners GDX surged nearly 16% in high volume the past four weeks as the price of the precious metal continually rose.
It sports a robust 96 Relative Strength Rating and 1.6 up/down volume ratio. It has oscillated between resistance at around 54 and support at 42 in the past four months. It broke past resistance last week, but in below-average volume. It's bounded 23% year to date, while the S&P 500 receded 12%.
The index spans five countries: Canada (64%), the U.S. (15%), South Africa (13%), Peru (5%) and the U.K. (4%). It holds 34 companies that mine for gold or silver. Investors should be cautious in buying stocks that depend on the price of the commodity but are bereft of competitive advantages, said Morningstar ETF analyst Jeffrey Ptak.
Market Risks
"Because these firms have enormous, fixed operating costs, their cash flows can swing much more dramatically than metal prices," said Ptak in a report. And because most of the world's gold is found abroad, currency fluctuations make the index twice as volatile as the spot price of gold.
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SPDR S&P Metals & Mining XME offers a more diversified play on metals and includes companies that produce coal, iron, steel and zinc.
It holds equal weightings in 25 companies that are all based in the U.S. It broke out of a 10-week, V-shaped base on Feb. 19. It rose to a new high of 78.05 and pulled back to the 10-week moving average, where it has found support. It has returned 5% year to date.
It sports a high Relative Strength Rating of 93, but its Accumulation/Distribution Rating declined from B- to D+ in the past two weeks. Up/down volume dropped from 1.0 to 0.8, indicating selling volume outpaced buying.
Newstex ID: IBD-0001-23786258
Originally published in the March 17, 2008 version of Investor's Business Daily.
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