The best way to make money on gold right now
Big rebounds all over the place this morning. Markets everywhere are breathing a big sigh of relief – or just taking a breather from crashing, depending on your view.
Japan's Nikkei index – never one to do things by halves, admittedly – is up by around 7% alone, and the 'safe havens' like gold and the yen are down.
So what's next?
Why the massive relief rally this morning?
There are a few reasons. The US ended higher on Friday. That always helps. Also, markets have fallen hard in recent weeks. There does come a point where the would-be bottom-pickers outweigh the "get-me-out-here" crowd.
Oil surged 11% on Friday too. "Oil gets more expensive" seems a stupid reason for markets to rally. But they've all been moving together with the oil price in recent months, so why stop now?
News that Japan's economy weakened again in the fourth quarter also cheered everyone up. Why? Because it makes it even more certain that the Bank of Japan will not tolerate the strengthening Japanese yen if it can do anything at all to prevent it from continuing.
And of course, at the end of last week, Jamie Dimon reached into his own pocket to the tune of $26m to buy up a pile of JP Morgan shares. I'm sure Dimon must have been more than aware of the echo of the Panic of 1907, when JP Morgan himself helped to put a stop to a rout in US markets by intervening with his own money to shore up the banking system.
The rebound isn't a bullish sign in itself. Big rallies and big collapses tend to cluster together historically. That's volatility for you.
But has anything else changed that might make this rally more durable?
Well, there was an interesting shout-out over the weekend from the Chinese central bank governor, Zhou Xiaochuan. He said that he sees no reason for continued depreciation in the Chinese yuan.
That's significant, because that's one of the things that started this whole panic off. The idea that China would massively devalue, sending a deflationary wave across the world, has been spooking markets for months.
Just because he says so, won't make it so, of course. But the yuan saw one of its biggest one-day gains since it first scrapped its "hard" peg to the US dollar in July 2005.
You should own gold as insurance – but here's the best way to profit from it
So is it back to business as usual?
Well, as I said on Friday, the key with these things is to make sure that you aren't in a position to be getting panicked out of "business as usual". I'm an owner of Japanese stocks today, and I was an owner of Japanese stocks all last week, and I'll continue to be so.
There probably will be more volatility. But we've also reached a point where those who haven't entirely lost faith in central bankers (and I think we're a while away from that point) are starting to sniff around stocks and think that there must be some value there.
And I do believe that in the longer run, inflation is going to be the killer, not deflation. It's perhaps a while away. But we'll see.
Anyway, there is one sector that I think is well worth paying extra attention to now. As a regular reader, I'm sure you'll already have some gold in your portfolio. We think you should hold some as insurance, and current events demonstrate precisely why.
But if you really want to make money from gold right now, we think that there's a better way to do it. Gold mining stocks have taken a horrendous beating in recent years – they've been among the worst–performing companies in the world.
It's not because gold miners were uniquely badly run (it's true to say that by and large, they were badly run – just that there's nothing unique about gold miners in that fact).
It's because they got bloated during the good times. They were barely able to make money at the top of the gold market in 2011. So when the price started to fall, they were in real trouble.
You can see this happening right now in both the wider mining sector and the oil sector. Overly-ambitious projects shelved. Staff costs and headcounts cut. A focus on survival rather than expansion. It's a cyclical business. This is what happens.
The difference is, the process started a lot earlier for gold miners than for the rest of the sector. And that means – we think – that they're ripe for investment just now.
MoneyWeek subscribers already know all this of course. Our first cover story in December spelled it out. Since then at least one of the tips in that story has doubled in value, while even the "staid" options mentioned have seen double-digit gains.
I've updated on their progress in the editor's letter in the current issue of MoneyWeek magazine, and we'll have a more detailed update, with new tips, coming out very soon.
If you're not a subscriber, now is the time to get on board. If gold miners are getting going for real this time – and I believe they are – then these gains could be just the beginning. And it would make a subscription to MoneyWeek look like the best-value investment you make all year. Don't miss out.