Many in the investment community have been sounding the warning bells over the future direction of gold, given all that's occurring in the global macroeconomic landscape. Using the SPDR Gold Trust (NYSEMKT: GLD ) as a proxy, the yellow metal is down more than 17% this year, and the 12-year rally for the commodity looks to be in real jeopardy. While industry insiders, like Goldcorp (NYSE: GG ) President and Chief Executive Office Chuck Jeannes, believe the rally will continue, there are some grim signs.
There is, however, another view that supports buying gold right now and viewing the sell-off as a major buying opportunity. Under this view, the run-up in the stock market is driven almost entirely by the Federal Reserve and when the central bank's easy money policies come to an end, the ensuing carnage will drive investors into hard assets. As gathering evidence suggests that the Fed is considering at least slowing the rate of quantitative easing, you should consider this view in approaching gold investments.
The 2013 gold outlook
When Goldcorp recently announced earnings -- missing analyst expectations by a wide margin -- the company maintained its full-year guidance. It's easy to dismiss this optimism as the predictable view of a mining CEO trying to support his stock, but given the size of the miss, it was also a real opportunity to lower expectations. Jeannes also stated in the earnings call that he believes the multiyear rally will be extended by the end of 2013.
Last week's Fed minutes show that a growing contingent inside the Federal Open Market Committee favors slowing or ending QE. In his testimony before Congress, Chairman Ben Bernanke warned of the risks of prematurely ending the policy but acknowledged that if the economy continues to show signs of strength, the Fed may be able reduce the $85 billion per month of bond buying by this fall. The Fed's QE policy has been widely viewed as creating inflation risk and bullish for gold; not only has that inflation remained at bay, but if QE ends without the arrival of the expected inflation, gold may come under pressure.
So why buy gold?
In a recent article from The Wall Street Journal, Paul B. Ferrell presents a compelling argument as to why Bernanke could be out of the Fed by August, that QE could end, and that the stock market could crash as a result. He considers several factors that could lead to a rapid rise in interest rates and the ensuing impacts. Ultimately, he is calling for an end to the Fed-driven bull market.
Vice Chairman Janet Yellen seems to be the expected choice to replace Bernanke at the central bank, but her likely actions are unclear. She's known to favor easy money as much as or more then Bernanke, but she has also stated that she is willing to raise rates when necessary. The Fed's balance sheet has been expanding at an alarming rate over the past several years that cannot continue indefinitely.
Unless the Fed is able to achieve the elusive "soft landing" that would be required for an orderly unwinding of the Fed's balance sheet and a manageable correction in the stock market, equities could come under violent pressure when rates start to rise again. When that occurs, gold is likely to regain favor and could run much higher. The precise timing is hard to fathom, but the stock market rally is overdone. Considering a prudent hedge is advisable for all investors, and an allocation to gold may be the best way to achieve it.
How to play gold
Owning shares of GLD is a solid way to gain exposure to gold and avoid some of the stock-specific risks associated with owning stocks such as Goldcorp. Barrick Gold (NYSE: ABX ) holds the appeal of being the largest gold miner on the planet, but it carries the same risks as Goldcorp. Despite the company's promise to tighten its belt, it faces the same pressures -- rising production costs and environmental concerns. If gold runs, silver is likely to follow suit. Thus, the iShares Silver Trust (NYSEMKT: SLV ) will probably move as well. The industrial nature of silver may make it more appealing in the near term while you wait for Fed policy to change. Likewise, Silver Wheaton (NYSE: SLW ) is a great way to get exposure to precious metals. The silver streaming company buys the output of other miners at a set cost, meaning it, too, is insulated from production cost concerns. The company has thus been able to simultaneously achieve an operating margin above 70% and still boast the largest silver reserve on Earth, at more than 1 billion ounces.
Ultimately, taking a somewhat diversified approach with the allocation you want to direct to precious metals is the way to go. The pure commodity play, GLD and SLV, has the appeal of being insulated from the stock market, but finding the blend that works for your specific needs is best. In any case, considering the role of equities should be a part of building your precious-metals portfolio.
If you're looking for a company whose success is determined by the metals market, but without involving itself in the risks of physically mining the metals, then Silver Wheaton provides a unique play on the future of silver. SLW chooses to finance the mining of silver; it has grown sales and net income every year since 2008, and also has increased competitive advantages over its limited peer group. To learn more about Silver Wheaton, click here now to access The Motley Fool's premium research report on the company.