The Key Gold Trade for 2013, Pairing Gold Against Miners
Any Wall St. pundit will tell you that the overprinting of money is a train wreck waiting to happen. The Federal Reserve balance sheet sits at almost three trillion dollars after two rounds of quantitative easing and Operation Twist. That’s three trillion dollars acquired out of thin air. So in addition to artificially lowering interest rates in an attempt to boost the economy, they have increased the specter of future inflation with inevitable interest rate increases. The tried and true method to hedge interest rate and inflation risk? Buy gold. But according to Jefferies Group Inc., there is a problem with that trade if you are long the gold miners.
In theory, owning the miners gives you exposure to the spot price. The downside to owning the miners is that gold mining is an extremely capital intensive business, often performed in very volatile locations like Africa and other high risk locations. They see absolutely no reason for investors seeking gold price exposure to own high multiple mining stocks, which due to their very nature expose the investor to even more inherent risk. This will spell bad news for Market Vectors Gold Miners ETF and for Market Vectors Junior Gold Miners ETF if Jefferies is right.
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Any Wall St. pundit will tell you that the overprinting of money is a train wreck waiting to happen. The Federal Reserve balance sheet sits at almost three trillion dollars after two rounds of quantitative easing and Operation Twist. That’s three trillion dollars acquired out of thin air. So in addition to artificially lowering interest rates in an attempt to boost the economy, they have increased the specter of future inflation with inevitable interest rate increases. The tried and true method to hedge interest rate and inflation risk? Buy gold. But according to Jefferies Group Inc., there is a problem with that trade if you are long the gold miners.
In theory, owning the miners gives you exposure to the spot price. The downside to owning the miners is that gold mining is an extremely capital intensive business, often performed in very volatile locations like Africa and other high risk locations. They see absolutely no reason for investors seeking gold price exposure to own high multiple mining stocks, which due to their very nature expose the investor to even more inherent risk. This will spell bad news for Market Vectors Gold Miners ETF and for Market Vectors Junior Gold Miners ETF if Jefferies is right.
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