How to Profit from Coming Aggressive Monetary Stimulus

NEW YORK (TheStreet) -- China released some critical information about their economy on Thursday that caught the attention of many Central Bank watchers.

In the release of the HSBC ( HBC) Flash Purchasing Managers Index, the earliest indicator of China's industrial activity fell to 48.7 in May from a final reading of 49.3 in April.

It marked the seventh consecutive month that the HSBC PMI has been below 50, indicating economic contraction, a.k.a. economic slowdown.

What really caught my eye was how it was reported in a CNBC news story. The story started off by saying that ongoing, "weakness in China's economic data, as well as growing risks of a Greek exit from the euro zone, will drive Beijing to launch aggressive stimulus measures in order to prevent a further deterioration of growth in the world's second-largest economy."

For weeks now I've been sensing the growing possibility of a coordinated monetary stimulus effort by the central banks of the U.S., Europe and China. Speaking of China and its current economic cooling, the article revealed that:

"All signs point to the fact that the slowdown is not letting up as fast as authorities had expected, partly because of challenging external conditions and partly because of the fact their tightening last year was too effective," Donna Kwok, HSBC, Greater China economist, told CNBC Asia's "Cash Flow."

"We are going to have to see more active support being directed directly to consumer and business rather than through the monetary system via the banks," Kwok added.

The article also cited some specifics concerning the kind of monetary actions that are needed as well as likely:

"Dariusz Kowalczyk, senior economist and strategist, Asia ex-Japan, at Credit Agricole, said the weak HSBC Flash PMI data strengthen the case for easing and he expects more fiscal stimulus.

"While Kowalczyk believes monetary policy is unlikely to be used as aggressively, he expects a push towards quantitative easing through "pressuring" banks to lend more via further reductions in the reserve requirement ratio."

If quantitative easing is required in China's robust economy, can you imagine how much more it's needed in the stagnant economies of Europe and the U.S.?

So here's the plan on how to profit from the reaction to the eventual monetary stimulation and massive injections of capital (and increased monetary velocity) that is coming sooner than later.

Begin with assets that will go up as a result of the weakening of the paper currencies. It's not rocket science, but whenever we've had Federal Reserve style quantitative easing, the symbols of wealth preservation went up sharply in value.

Here's a 5-year chart of the SPDR Gold Share ETF ( GLD). You can see where economic stimuli and Quantitative Easing (QE) began in late 2008. QE1 was announced at the end of August 2010 and QE2 kicked in the spring of 2011. Each time it fueled gold's ascension higher and higher.

Two interesting ways to profit from the coming rebound in both gold and silver is to consider these two ETFs: the Central Fund of Canada ( CEF) and the ASA Gold and Precious Metals ( ASA).

As the Central Fund of Canada web page makes clear, the purpose of CEF is to make it relatively easy to invest in both gold and silver in a tradable, priced-per-share basis. Over 95% of the money invested is split between gold and silver bullion, with the remaining 5% kept in cash for redemptions.

The fund's gold and silver bullion is stored in "the highest security rated treasury vaults at a Canadian Chartered Bank on an unencumbered, allocated and segregated basis".

That means there's real gold and silver behind the net asset value of each share of CEF. It's not co-mingled with other bullion and, as far as we were told, it is insured and fully inventoried.

As of May 24, the share price is selling for a 1.2% discount to its net asset value. So with each share you'll be able to participate in the rise of both precious metals, and they WILL rise IF aggressive monetary stimulation is implemented.

The ASA Gold and Precious Metals ETF is a unique breed of "self-management" investment trust.

The firm invests in publicly-traded stock markets across the globe. It primarily invests in stocks of companies engaged in the exploration, mining or processing of gold, silver, platinum, diamonds, or other precious minerals. ASA was founded in 1958 and is based in San Mateo, California.

On the ASA home page we learn that "the Company provides investors a vehicle to invest in a portfolio consisting primarily of the stocks of companies engaged in the exploration, mining or processing of gold, silver, platinum, diamonds or other precious minerals.

"It may also invest in gold, silver and platinum bullion or securities that seek to replicate the price movement of gold, silver or platinum bullion."

So investors in ASA shares get the leverage of precious metals equities and the lowered volatility of owning the bullion.

The good news for potential investors of ASA is that the current share price of $22.74 is also selling at about a 1% discount to the net asset value of the company's shares.

More speculative investors may also consider deeply discounted small- to mid-tier producers of gold and silver.

Two examples would be IAMgold ( IAG) -- which is currently selling at a P/E ratio of around 5 and pays a 2.6% dividend -- and Silvercorp Metals ( SVM) -- which has risen over 17% in the past week, has no debt, over $154 million in total cash, and pays a 1.7% dividend to boot.

Expect plenty of volatility with precious metals and the above-mentioned companies. Seven months from now the prices of gold, silver and these companies may make today's prices look amazingly low.

Disclosure: At the time of publication, Marc Courtenay was long CEF and IAG.

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