Time For This Market Hedge Play to Shine

Investors have finally gotten worried about inflation, or at least how quickly the Federal Reserve will act to try and curb it. Given how the Fed has historically acted too weakly and too late in economic cycles, traders might want to turn to gold as an ideal hedge now.

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  • The metal has underperformed just about everything in the past year, even as inflation rates have jumped up. However, as part of a broader commodity rally, gold may yet have a strong year once again.

    Besides that macroeconomic view, the technical indicators for gold are firming up after the metal’s latest drop. That could see gold make a move higher in the coming months.

    With gold potentially moving higher, gold miners should profit. The VanEck Vectors Gold Miners ETF (GDX) could be an ideal vehicle to play the rise of gold without the risk inherent to investing in any one specific company.

    The fund sank just over 20 percent last year, as gold prices traded flat. However, the fund tends to oscillate between good years and poor years.

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  • Action to take: Investors can buy the ETF here and even lock in a small 0.5 percent dividend yield, which may rise as companies in the ETF pay out higher yields over time.

    For traders, the June $40 calls, last going for about $0.33, are an inexpensive way to bet on a move higher in gold in the coming months. Shares of the ETF would need a strong rally to move the option trade in-the-money, but a quick move could still lead to high-double-digit returns.


    Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.

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