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GLD Working While S&P Is Floundering

Earlier this week I published two buy recommendations- GLD at $88.47 (the ETF for Gold, which is the easiest way to own it), and EZA- the ETF of the Dow like stocks of South Africa.

My view- GLD is probably headed to $100 in pretty short order, which equates to $1,000 per ounce in gold. EZA should mirror the movement in Gold as South Africa industry is very mining focused, and has the longest established and some of the most prolific producers. And, as importantly, EZA pays a cash dividend of 6%, which significantly enhances your total return opportunity.

The S&P and DOW are both stuck in trading ranges since coming off the November lows. There's lot of talk about the DOW being skewed. 9 of the 30 DOW stocks are trading below $10 per share which has never happened - courtesy of the financials. Remove the financials from the DOW and the S&P 500, and you have a much healthier picture. Tech is trading up along with Small Cap Value. There is more underlying strength than the major indexes are indicating.

I want to take another look at my published ideas from earlier this week. Here's a longer term look at GLD, the ETF for Gold. Gold made the $1,000 level last March, and then fell all the way be to $700 as the recession gained strength.

Since making it's bottom in November along with all the equities, Gold has behaved like a champion. It's made a serious of higher lows and higher highs for the last 3 months. More importantly, Gold is butting up against the downtrend line from the top made last March. A solid break above $92 would suggest a major breakout, and we're very close right now.

So, let's turn to my arbitrage idea if you like Gold. EZA- the South Africa ETF. South Africa is one of the largest and longest established mining centers in the world. Nearly 50% of the holdings in the ETF are basic materials companies. The average PE ratio in the portfolio is 8.79.

EZA is not as close to a breakout relative to GLD, which suggests a bit of a lag factor in the idea. I recommended this South Africa fund made in December at $34. Yesterday, it closed at $34.36, which isn't bad when one considers both the DOW and S&P 500 took 10% hits in the month of January. Factored into the total return on EZA is the 6% dividend. This idea is starting to work, but hasn't really broken out yet.

It probably needs to eclipse the $36.50 to really get into breakout mode. As Gold appreciates, I'm hypothesizing EZA will follow it up. Owning EZA gets you both the dividend and the appreciation.

If you like these ideas, but don't want to pledge the kind of capital it takes to own a $34 stock or a $90 stock, you might want to consider the options. They are much riskier, but offer a lot of leverage for a little money.

For GLD- the April $90 calls are trading at $6.25- it's a big time premium, but if GLD finds its way to $100 you're likely to enjoy a 50% to 100% return. The calls trade under the symbol GLD.DL. If you're more sophisticated and have a lot of capital, you should consider shorting the puts. It's a bit trickier and takes a lot of money.

For EZA- The April 35 Calls are trading at about $2.25. That's a pretty reasonable premium. A $2250 investment gets you 10 calls, and you control 1,000 shares. This call trades under the symbol EZA.DG. With EZA, shorting the puts might be a good strategy as well. If you've never done it and don't understand it, now is not the time to educate on this strategy.

Own either or both- in my view money is flowing to Gold. The dollar is losing steam, and the US is going to have to print a lot of money to spend our way out of this recession, which is favorable for gold. Here's two ways to make money on that trend.

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