Phew, I think we're all breathing a collective sigh of relief—2008 is officially over!
Don't get me wrong, I wish the markets would go up forever and we all could be rich and never have to worry about a thing. Realistically, that just isn't going to happen. Those of us prepared for what is ahead, however, realize its times like these when genuine opportunity is created.
In that spirit, I'd like to reveal the 'Trade of Year.' It's not too often a trade like this comes along, as it's only created by a truly chaotic market. This trade will capitalize on a small market sector, which is completely out of whack. To top it off, the rare blend of limited downside and unlimited upside will have any investor or trader salivating.
The 'Trade of the Year' is on gold—but it's not what you think. As far as I'm concerned, gold is still at a midpoint. The bond market is predicting deflation, and deflation pushes down the value of everything—it can destroy an economy. Every major bust has ended in deflation—every bust.
The Fed is doing everything in its ever-broadening powers to prevent deflation. It wants inflation. Americans won't start consuming again until their debts are paid off. The sooner the Fed can inflate them away, the sooner the U.S. economy can get back to some sense of normalcy. No one knows if the Fed can win this battle. They've never won the battle against deflation before, but they've never been this aggressive before. Only time will tell. However, with the 'Trade of the Year,' it doesn’t matter.
This is why, I believe the 'Trade of the Year' is to short SPDR Gold Shares (NYSE:GLD) and buy Market Vectors Gold Miners (NYSE:GDX) on an even $1 for $1 basis. This way you profit as the Gold/XAU returns to its historical norm of four.
Gold could go to $1,000 or $2,000, which would cost a lot on the short position but would certainly be made up on the valuation of the gold mining stocks. Alternatively, if gold prices collapse the mining shares will fall too, but gold should fall a lot faster than the mining stocks.
It's the best of both worlds. If gold goes up, we'll make a killing. If gold drops, we'll probably break even.
There are plenty of ways to take advantage of a coming rally in gold, but I consider the short gold/long gold stocks the trade of the year. It's a "win/don’t lose" type of trade that only comes along every once in a while. If you keep an eye on risk/reward, there won't be too many better trades you can make this year.