Gold Bugs Flying High

Also, there is a big argument about the validity of the CPI and PPI. Many economists feel the baskets they track are outdated. Clearly, not only fuel has moved up in price, but health care and education have moved up significantly and it's not truly reflected in the indexes. On the other hand, cheap imported products from China are being weighed too heavily, which skews the data.

Technically speaking, when gold has rallied this year, it has been setting lower highs before pulling back. Is this another head fake?

Gold is a very niche market. It's narrow. So that makes it volatile. So many factors influence gold, like the dollar and inflation, that it makes it very difficult to judge technically.

So what is the best way to play gold stocks?

It depends on your investment profile. In general, investors should not try and daytrade gold. It's too volatile. But they should put 5% to 10% into precious metals as a hedge just in case everything else goes wrong.

If gold is the asset of last resort, it did not seem to move too much after the London bombings. Is it still a safety haven?

I think geopolitical problems have become a weaker factor in moving gold prices. That's because events like the London bombing are localized. They may have made Londoners scared, but it was not a world war situation where several countries are involved. The more countries that are involved, the more it will move gold prices.

Most mining companies are headquartered in Canada, South Africa, Australia and the U.S. Is one country better than another when it comes to extracting gold?

It depends more on the management of the company than the individual countries. The whole point is to extract the gold at the lowest cost possible. It's a project-by-project determination.

In general, however, I think that North America is better than elsewhere. There are not too many names to buy in Australia, and South Africa has a lot of labor troubles. It's getting tougher over there. North America is the most stable. Latin America has been looking better as well. Down the road, I expect Chinese and Russian miners to come on strong.

What are your top picks?

There are very few true growth companies in the gold sector. However, I think one company with a lot of potential to grow is Glamis Gold (GLG Quote). They have several great properties in North and South America and have a management team that understands efficiency. They also have a strong pipeline and reserves.

I also like Newmont Mining (NEM Quote), which is my largest holding in the fund. They are a very well diversified company with great properties in many locations. From a geopolitical point of view, they are diversified. Plus, Newmont has a history of being sophisticated when it comes to technology.