Competing forces
The existence of any global economic crisis tends to be a bullish factor for gold. As investors scramble for safety in tangible assets, like gold, both the physical commodity and paper gold, like the SPDR Gold Trust (ETF) (NYSEMKT:GLD), tend to see upward pricing pressure from the flight to safety or risk-off trade. The resolution of such a crisis is, therefore, a bearish force on gold and silver prices as the flight to safety is reversed. Within this limited view, the resolution of the situation in Cyprus is bearish.
Also likely to drive down commodity prices is a strong U.S. dollar. When the dollar is strong, U.S. dollar-denominated assets are more attractive and represent a safe haven of their own. The initial reaction to the bailout was to strengthen the euro, making gold more attractive, but this quickly reversed course. As the euro weakened and the dollar strengthened, this could be seen as a negative for metals.
On a longer-term basis, however, continued weakness in Europe will mean a lack of stability on the global economy. This is a bullish factor that will directly conflict with the bearish factors I’ve mentioned. The lingering concerns over the EU’s future mean that there will be some flight to safety. Ultimately, while the resolution is a near-term negative for gold and silver, over the medium term, precious metals may benefit.
Ways to play
In addition to a straight allocation to the SPDR Gold Trust (ETF) (NYSEMKT:GLD), which will offer you the most commodity-like returns, there are some interesting mining plays to consider. While Barrick Gold Corporation (USA) (NYSE:ABX) reported a loss for the most recent quarter, largely on increasing costs and environment concerns, CEO Jamie Sokalsky continues to push for changes in how the industry operates. As these are affected, Barrick Gold Corporation (USA) (NYSE:ABX) looks to be well positioned.
In addition to major gold miners like Barrick Gold Corporation (USA) (NYSE:ABX), Hecla Mining Company (NYSE:HL) looks interesting at current levels. The company operates in both the precious- and base-metal segments and may provide you with a more diversified revenue stream. While Hecla Mining Company (NYSE:HL) has a high multiple, it offers a way to get diversified exposure that may prove rewarding.
The article Will Cyprus Affect Your Precious-Metals Portfolio? originally appeared on Fool.com and is written by Doug Ehrman.
Fool contributor Doug Ehrman and The Motley Fool have no position in any of the stocks mentioned.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
