Tags: Arends | gold | Argentina | crisis

MarketWatch's Arends: Argentina Is Causing a New Gold Rush

By Michael Kling   |   Tuesday, 04 Feb 2014 07:14 AM

A crisis in Argentina may be prompting a new gold rush, according to MarketWatch columnist Brett Arends.

Argentina's financial crisis and the collapse of its currency prompted gold prices to spike 25 percent in that country in January, jumping to a record high of 10,000 pesos per ounce.

And that's just when using the official exchange rate, he says. The peso's unofficial exchange's rate that people use on the streets may be as low as 60 percent the official rate.

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Many economists believe Argentina's inflation rate may now be 25 percent a year, but some say it could be as high as 74 percent.

Gold is also rising in other emerging markets such as Brazil as well as Turkey, where it jumped almost 20 percent in January, he points out.

"The situation in Argentina may be exceptional, but it is not unique."

Investing in gold mining companies, rather than the metal itself, is the way to go, according to Arends.

Under the Bennett rule, named after London money manager Peter Bennett, investors are bound to do well if they invest in durable assets that have fallen more than 60 percent from their peak.

Stocks of gold mining companies have fallen so low they meet the criteria, Arends notes. They've become the leper of the investment world. Gold bugs look down on them because they view them as paper, he explains. Stock investors look down on them because they view them as gold.

Although it recovered somewhat recently, the Philadelphia Index of Gold & Silver miners fell 65 percent from its April 2011 of 229 to 80 at the end of 2013.

Gold meanwhile has gone from a peak of $1,900 an ounce in September 2011 to $1,263.

Gold mining stocks, having fallen more than gold itself has. Therefore, it may be the cheap way to own gold.

Others think gold could enter another bull market, as emerging market currencies slide.

"Gold becomes the ultimate currency" in times of trouble, Bill O'Neill, a principal with commodities trading firm Logic Advisors, tells The Wall Street Journal.

"You have problems in Argentina, Turkey, Brazil, India," he notes. "There's been myriad financial and currency related problems around the world, and gold really hasn't been able to break out."

Although gold has risen, gold exchange-traded funds haven't yet become popular again, Arends adds.

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