Rules of the Game: Gold Not All Glitter

 | Jun 20, 2013 | 9:00 AM EDT  | Comments
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When I hosted a trading-oriented radio show, one of the most common call-in questions concerned gold. People wanted to trade gold ETFs, junior miners, Canadian-listed miners, you name it. They wanted gold exposure.

It helped that the program I hosted was sponsored by mining companies, and the company owner published a gold-trading newsletter. The idea of buying yellow metal, in some form or fashion, was always in their minds -- and not in a subtle fashion!

With equity and fixed-income market volatility uppermost on people's minds (and the financial cable channels will remind you, if you happen to forget about it for a minute), more and more investors are focusing on gold. That doesn't mean they all want to go long: There's plenty of interest in vehicles to short various parts of the sector.

Case in point: An ETF with strong technical performance at the moment is the Direxion Daily Gold Miners Bear 3x Shares (DUST). The objective of this vehicle is to achieve 300% of the inverse of the NYSE Arca Gold Miners Index performance.

No, that doesn't sound risky or speculative at all. (If I were on Twitter, I would add a #sarc tag to that remark. Just saying.)

Do I hate gold? No. Just look in my jewelry box. Does it bother me that there are way too misconceptions about the shiny metal, and plenty of newsletters and trading systems that take advantage of people's fears? Absolutely.

Before the 1970s, there wasn't much widespread interest in trading gold as an asset class. Yes, 1971 was the year Richard Nixon signed the act that officially moved the U.S. off the gold standard, but most people don't realize that the nation had been off a true gold standard since the 1930s.

History buffs will recall that the Roosevelt administration required citizens to turn in their gold for a price of $20.67 per ounce. A year later, the Gold Reserve Act upped the price to $35 per ounce all at once! Ten years later came the Bretton Woods Agreement, linking 44 countries' currency to the dollar. That diminished the role of gold as a monetary standard.

I could go on and on with the history lesson, but I won't. It's all on Wikipedia, so you don't need me to do this. After Nixon signed the act ending direct convertibility of the dollar to gold on a global basis, the stream of "Armageddon" books started to come out.

To this day, there is no shortage of crisis-investing pundits. Since the gold-crisis writers published their books in the 1970s, you'll notice that the widespread global meltdown has not occurred, and gold did not reach the price of thousands of dollars per ounce, as predicted.

I realize that gold has a place as a hedge against hyperinflation. That's not the same, however, as a hedge against a world that looks like "Mad Max."

My message remains the same as it always has: Keep your focus on your retirement portfolio that creates cash flow, interest income, or dividends. Gold is not an investment in the same sense that your equity and fixed-income investments are, but it could have some value at a time when you need to cash in some investments to meet a specific obligation. There is nothing wrong with that.

Gold can be viewed as an alternate currency. But stay away from the highly-touted trading vehicles that induce you to panic because of the last thing Barack Obama, Ben Bernanke, Angela Merkel or Christine Lagarde said.

Remember: There are lots and lots of people in the business to scare you and take your money. By getting you to focus on gold, they have just one more avenue to line their pockets. And you notice: They always ask for payment in dollars, not in bullion.

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