3 Plays on Gold in Case Trust in the Fed Slips

Key Points

• With persistent inflation, a worsening economy, and threats to the Federal Reserve's independence, analysts are watching for signs that public trust in the central bank could slip.
• In that case, many analysts expect a significant uptick in the price of gold.
• To be positioned to benefit from a development in this direction, investors might consider a top gold mining firm or one of two gold-focused ETFs with very different approaches.

With the Trump administration's efforts to exert control over the Federal Reserve, most recently evidenced by the firing of Lisa Cook of the Fed's Board of Governors, the U.S. central bank is potentially entering a political environment that could have a dramatic impact on its public standing both inside and outside of the country.

Analysts across Wall Street have sounded alarms about the potential repercussions of an erosion of public trust in the Fed. Those at Goldman Sachs and JPMorgan have speculated that a chain reaction could lead to a price explosion for safe-haven commodities like gold.

Gold has repeatedly hit all-time highs in recent months and reached a new record of $3,692 per ounce on September 8. However, if analysts are correct, this rally—totaling nearly 46% in price increases in the past 12 months—may be just the beginning. 

They expect gold could surge to $5,000 per ounce or more as investors around the world rush away from the dollar and seek out safer alternatives. In this case, investors should be prepared to capitalize on the opportunity, and there are a few potential ways to do so, including both gold stocks and ETFs.

1 of the Largest Mining Firms Is Poised for Continued Growth

Canadian gold producer Agnico Eagle Mines Ltd. NYSE: AEM is not only one of the largest mining firms in the world, it is also uniquely positioned to benefit from a potential surge in the price of the metal itself.

Miners like Agnico may offer advantages to investors compared with direct investments in gold—for one, their fixed costs help ensure that increases in the price of gold lead to radical improvements in profitability metrics.

Agnico is distinguished from other producers by the strength of its assets, which primarily lie in the relatively stable jurisdictions of Canada, Finland, and Mexico.

The company continues to expand its projects through upgrades to its preexisting mining infrastructure and successful strategic acquisitions.

This helped the firm achieve record free cash flow while massively reducing its overall debt in the latest quarter, which should help the firm navigate any uncertainties or volatility in the broader market.

Despite an early-September downgrade by Zacks, Agnico remains a strong analyst favorite based on 12 Buy ratings and three Holds. Investors may want to keep an eye on shares, however, after climbing by nearly 89% this year, the share price has already exceeded analysts' consensus price forecast.

A Buy-and-Hold Gold ETF...

If mining outfits like Agnico provide a somewhat indirect access point to gold, a large step closer to holding bullion itself is the iShares Gold Trust NYSEARCA: IAU, an exchange-traded fund (ETF) that holds the precious metal. This fund aims to mimic the spot price of gold by storing the metal in vaults so that investors don't have to.

For investors lacking the resources or knowledge to store their own gold safely—or for those looking to purchase a larger quantity of the metal—IAU takes a good deal of the hassle out of the process.

Of course, the ETF does charge expenses for these services, but with an annual fee of 0.25% the fund is among the cheapest options providing this reasonably direct exposure to the metal itself. It is also essentially a pure-play gold investment, as the price of shares of the ETF is not likely to be impacted by any factors other than the price of gold itself.

Still, the relative lack of liquidity makes IAU best suited for those investors looking to buy and hold gold over a longer period.

...And a Gold ETF for Active Investors

In contrast to IAU, the ProShares Ultra Gold NYSEARCA: UGL is a gold fund made for active investors.

Those anticipating volatility in the price of the metal as it rises might seek out this ETF, which provides 2x daily exposure.

Given the leverage and the daily reset, UGL is only suitable for very active traders who are looking to enter and exit a position within a single day. Its high expense ratio of 0.95% also far exceeds IAU's.

However, for investors looking to capitalize on single-day bumps to the price of the metal, UGL can magnify those returns in a powerful way.