Before my recommendation today, I need to preface it with something I often say.  I am a fan of setting up a permanent portfolio as described in Harry Browne’s book, Fail Safe Investing.  I believe that you should have at least half of your investment portfolio in a permanent portfolio setup.  For more conservative investors, it should be even more.

Going beyond this, I think it is acceptable for more aggressive investors to speculate with money that they can afford to lose.  It is to these people that I speak today.  My recommendations are not meant to be part of your permanent portfolio.

Gold has had an outstanding run, particularly this week.  It keeps hitting new all-time highs (in nominal terms).  While I wouldn’t be surprised to see a pullback, there are a lot of reasons to be bullish on gold going forward.

One interesting thing about this latest run in gold is that gold stocks have not managed to keep up.  While the price of the metal is hitting new highs, most gold stocks are off of their all-time highs.  While this trend could continue for a while, I can’t imagine it continuing forever.

Gold stocks are a difficult play.  They are far more volatile than the price of gold.  You are also taking on the risk of owning a company, just as when you buy any company’s stock.  You are at risk that the government of whatever country the company operates in could violate property rights and destroy the company’s investment.  You are at risk of bad management.  You are at risk that the company will not find new gold.  You are also at risk of a stock market crash, as a market crash could drag down gold stocks with it.

With all of that said, I still think this scenario presents a golden opportunity.  If gold goes into a mania phase (which it isn’t yet), then gold stocks could go up exponentially.  There is no guarantee, but holding gold stocks can be like having leverage in the gold market.  If gold doubles in price over the next couple of years, gold stocks could easily go up 3 or 4 times that.  Again, there are no guarantees, but I am just pointing out the possibilities.

Owning single gold stocks is usually too risky for me.  If you are going to try this, don’t put a lot of your money at risk, particularly if it is a small company operating in a risky country.

My recommendation today is to buy either GDX or GDXJ.  These are exchange traded funds (ETFs).  GDX invests primarily in stocks of companies in the gold mining industry.  GDXJ invests in smaller companies in the gold mining industry.  Both are well off of their 52 week highs.

If you are looking for a good gold speculation while wanting to avoid the risk of owning any one stock, these might be worth a look.  You can buy these through a typical online brokerage account.  While I’m not making any predictions in the short term here, I do think these two ETFs have potential for big gains over the next couple of years.

There was an announcement today that the central bank of South Korea recently bought more than one billion dollars worth of gold.  This was supposedly the first time in more than a decade that the Bank of Korea has been a buyer of gold.

This news has driven the price up about 2% today.  It is currently over $1,650 per ounce.  This happened on a day in which the dollar was up slightly and the stock market plummeted.  For anyone who has employed my speculation strategy of shorting the stock market and going long on gold and gold stocks, today was a banner day.  Of course, one day does not make a trend.

There are more and more signs that the economy is getting worse.  The trouble in Europe keeps getting worse, or at least it is becoming more well known.  And we know the U.S. is in major trouble when the establishment rating companies are threatening a downgrade of U.S. debt.  There are two things that did well today in the investment world.  Treasuries went up and gold went up.  This tells me that investors are flocking to safety.

I don’t think I’ve ever seen so many bullish signs for gold.  Perhaps this means that there will be a correction (being a contrarian), but any dips in the price should just be a buying opportunity.  As we saw today with South Korea, central banks are buying gold.  This is putting a floor on the price of gold.  We have seen pullbacks, but there has been nothing extreme since 2008.

With all of the trouble in the U.S. economy and around the world, I am a pessimist in the short term.  I see either a major recession/ depression or major price inflation.  Let’s just hope that we don’t get both at the same time.

The federal government and the Federal Reserve are in a jam.  I really don’t think they know what to do. They are Keynesians and they are either deliberately lying to the American people or they don’t understand that their own reckless spending and monetary inflation is the cause of all of this.

I am still recommending that you keep at least half or more of your investments in a setup like the permanent portfolio as outlined in Harry Browne’s book Fail Safe Investing.  For speculation, I like a combination of gold, gold stocks, and stock market short positions.  I still would not bet against bonds at this point.  We saw what happened today as interest rates went down again.

Tomorrow I will recommend a good gold speculation for your portfolio.

As I predicted, it looks like the politicians in DC have “compromised”.  Although it isn’t yet official as I write this, it looks as though the Republicans are set to once again throw their constituents under the bus.

The “plan” that will be passed will have less than $1 trillion in cuts with possibly another $1.2 to $1.5 trillion determined later.  The current budget deficit is around $1.5 trillion per year.  But there is a problem.  The 1 trillion dollars in cuts is over 10 years.  That works out to just $100 billion per year in cuts, which is less than 10% of just the yearly deficit.  Even if there is a total of $2.5 trillion in cuts, that still works out to an average of just $250 billion per year.

Then there is another problem.  Most of the projected cuts take place in the future.  I heard that there is really only about $30 billion worth of cuts for the next budget.  The Congress cannot control what is actually spent in 2 years or 10 years.

Then there is still yet another problem.  These supposed cuts are not actually cuts.  It is based on the projected baseline budgets for the next 10 years.  The budget is projected to increase substantially over the next 10 years.  So this “cut” of 1 trillion dollars is really not a cut at all.  It is simply a reduction in the increase that was projected to take place.

I heard Rush Limbaugh on the radio last week.  I am not usually a fan, but he made an interesting point.  He said that if a deal was reached to just hold spending the same over the next 10 years, then according to the Congressional Budget Office (CBO), this would be considered a cut of $9.5 trillion.  If this is true, this just points to the absurdity of this latest deal.  I am not sure of the accuracy of his figure, but the amount is certainly several trillion dollars.  Again, the Republican politicians in DC have once again proven to be absolutely horrible.

As for gold, the price fell a little on the news, but it is still holding well above the $1,600 mark.  Peter Schiff has written a piece about the prospects for gold given different scenarios.  You really only need to pay attention to his “bullish gold case #2”.  This is the scenario of having the debt ceiling raised with symbolic cuts in spending.  He is right that this is bullish for gold.

I am actually baffled that investors could see the latest deal making in DC as bad news for gold.  It should be quite the opposite.  With a massive increase in the debt ceiling, it means there are no immediate plans to cut any significant spending.  It means that the debt will continue to grow.  It means that the Fed will continue to buy government debt.  It means that the monetary base will continue to go up.  It means that the dollar will get weaker and gold will go higher.