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« Save the Virgins! | Main | OPTIONTRADER: Trading Record »
Saturday
Jul102010

Time to Board the Gold Stocks Train?

Gold Stocks Followed Gold in Q2 09 July 2010.jpg

By Jeff Clark, Senior Editor, Casey’s Gold & Resource Report


One of the big hints that gold stocks will be ready for take-off is when they stop following the broader markets and strictly track gold, particularly if the market falls and gold stocks don’t. We now have data showing this has just occurred.

From April 2009 to April 2010, gold stocks mirrored the S&P. The two markets held hands as often as high school sweethearts; there was very little separation between them. While it wasn’t always a daily connection, any weekly and especially monthly chart showed them moving in tandem.

Until now.


DOW Gold Ratio On its way to One 09 July 2010.jpg

For the quarterly period of April through June, gold stocks advanced 11%, tracking gold’s gain of 10.7%. The S&P, however, lost 14.1%.

We haven’t seen this level of separation between gold stocks and the general stock market since the first quarter of 2009. This demonstrates obvious strength in our sector, and is precisely the kind of action that can signal we’re getting closer to our precious metals investments starting a major leg up.

In the big picture, this data should be considered a short-term indicator. However, it’s a refreshing reminder that at some point, it won’t matter what the broader markets are doing. In the precious metals bull market of the 1970s, the Barron’s Gold Mining Index soared 652%, while the S&P gained only 22% for the entire decade. This means that if you’re bearish on the economy, you don’t have to be bearish on gold stocks.

Whether this is the beginning of permanent separation or not, the following chart tells us the stock market, in relation to gold, is going one direction.



At gold’s bottom in April 2001, the Dow/Gold ratio (DJIA divided by gold price) was 41.2. It now stands at 7.9 (as of July 2).

When gold peaked in January 1980, the Dow/Gold ratio reached “one,” meaning they were both selling for about the same price. To hit that same ratio today, gold will have to go higher and the Dow simultaneously lower. The fundamental reasons gold will rise are far from over, and a second leg down in the broader markets seems almost locked in at this point.  

In this context, Doug Casey’s call for a $5,000 gold price doesn’t seem so farfetched. It also coincides with his call for a Greater Depression, an environment not exactly suited for higher stock prices. $5,000 gold = 5,000 Dow.

Where do you think they’ll meet – three? Eight?

This has obvious implications for your investments. If you’re investing for the big picture, you first want to think twice about any conventional stock investment. You might even consider a short position on one of the indices, something without a time limit, such as an inverse ETF.

Second, you should plan on higher gold prices. While pullbacks are inevitable, it does mean that even if you don’t own gold yet, it’s not too late. In fact, any excuse you have now for not buying gold will seem shallow and meaningless when the dollar begins cratering and so does your standard of living.

Third, don’t shy away from gold stocks. Yes, they’re still stocks and thus vulnerable, and we’re not sure the separation is here to stay, but selling your core holdings would be, in my opinion, a mistake. One of these days gold stocks won’t wait around for you to jump back in. And you could find yourself chasing them, a tactical error for the investor looking to maximize profit from what we believe will be a once-in-a-generation bull market.

In fact, if you had followed only this strategy since the precious metals bull market began in April 2001, you’d be up 375% in your gold holdings and up 707% in your gold stocks. An investment in the S&P, meanwhile, would’ve returned you exactly zero.

It’s our opinion this trend will continue. Gold stocks could very well get cheaper in the short term, handing us an excellent buying opportunity. But in the big picture, they’re destined for much higher levels.

My advice is to make sure you’re on the right side of this trend.

----

What’s a good price on gold, silver, and precious metals stocks? We’ve charted every summer pullback in prices since the bull market began in 2001, giving us target zones for every asset in our portfolio. Our Summer Buying Guide is an invaluable resource for identifying a good bargain in our industry. And you can access it right now, for $39 per year, with a risk-free 3-month trial. Click here for more.







Have a good one.

Got a comment then please add it to this article, all opinions are welcome and very much appreciated by both our readership and the team here.

The latest trade from our options team was slightly more sophisticated in that we shorted a PUT as follows:

On Friday 7th May our premium options trading service OPTIONTRADER opened a speculative short term trade on GLD Puts, signalling to short sell the $105 May-10 Puts series at $0.09.

On Tuesday the 11th May we bought back the puts for just $0.05, making a 44.44% profit in just 4 days.



Accumulated Profits from Investing $1000 in each OPTIONTRADE signal 14 May 2010.jpg

Recently our premium options trading service OPTIONTRADER has been putting in a great performance, the last 16 trades with an average gain of 42.73% per trade, in an average of just under 38 days per trade. Click here to sign up or find out more.


Silver-prices.net have been rather fortunate to close both the $15.00 and the $16.00 options trade on Silver Wheaton Corporation, with both returning a little over 100% profit.

To stay updated on our market commentary, which gold stocks we are buying and why, please subscribe to The Gold Prices Newsletter, completely FREE of charge. Simply click here and enter your email address. (Winners of the GoldDrivers Stock Picking Competition 2007)

For those readers who are also interested in the silver bull market that is currently unfolding, you may want to subscribe to our Free Silver Prices Newsletter.

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Reader Comments (1)

21st Century Gold Rush UP DATE
(How High Can Gold And Silver Stocks Go?)
Aubie Baltin CFP. CTA, CFA, Phd. (retired)
Back in the late 1970's, the lineups to buy gold were reminiscent of people waiting to buy Stanley Cup Hockey tickets at the then Famous Montreal Forum. There they stood all raped up in their Parkas, ski jackets, bulky sweaters, construction boots and as well as executives in their Patten leather shoes, business suits and cashmere coats. They ranged in age from their early teens to their 80's; Waiting for hours on end, to buy Gold. The analysts and economists cited a litany of reasons to explain the new gold rush but nobody cared. Gold prices were said to have become a barometer of political and economic fears but in the end it was pure GREED that drove the price until it finally peaked in January 1980, as it hit $850 an ounce, on the very day Americans were finally allowed to buy and own gold; the day that the big surge of American buying was to drive gold to $5,000. 'The Obvious is Obviously Wrong" that fact was already discounted in the price. Tell me something that everybody doesn't already know, that's when I'll have something of value. The only important factor was simply that prices were skyrocketing. Anybody who was in was making money and everyone else was afraid of being left out in the cold. Gold was selling for $250 when 1979 began. Later, amazed at the sudden surge above $700, gold devotees began to think $1,000 + some even thought $5000 or even $10,000 was possible. The rocketing prices even startled the experts and frighten the analysts who had forecast a precious metals boom but not one like these newspaper reports and articles on gold and silver which were all over the front pages in late 1979 and early 1980, but not before. Articles such as; "Industrial users worried about gold prices," "Silver soars even faster than gold", "Canadian traders say silver's popular", "Gold stocks look even better," "Ottawa won't announce timing of gold sale," were everywhere. Although we are probably years away from any newspaper articles of this sort, Rest assured that before this bull market in precious metals is over there will be similar front page stories around the world and Cramer will be yelling booya booya at every gold stock that will then permeate his program.

If your worried that it's too late now, that you missed the move; just ask yourself how much space is being devoted to the fact that gold just broke out to a new recovery and 18 year highs. (Then as today most analysts and the Media completely ignore gold, it's only us so called gold bugs that continue to believe in this bull market), Well I'm not a Gold Bug, I'm a realist and an economists that studies the past as well as human nature. Right now you would be lucky if you can even find a quote for gold let alone any booya's for gold or gold stocks. By going back in time to the 1970's I have focused on gold and silver stocks just to give you an idea of what they will perform like in the next 3-5 years, and to see what happened back then when gold first hit $500 then $600 then $700 and finally $850. I started my research by going to the library to look at newspapers from the 1970's, and WOW did I find some amazing things!! The Library that I went to had the Financial Post newspapers on microfilm all the way back to 1972, the very beginning of the last gold and silver Bull market. There were very few if any articles when gold moved from $35 in1972 to $200 by 1976, and hardly anybody noticed when Gold dropped back down to $100 in late 1976. The plethora of stories didn't even begin to get published until late 1978 early 79 and they didn't hit the front page until December 1979 into January of 1980 the final blow off top.

The stock tables that I found were absolutely amazing. In 1975 most gold and silver stocks were trading at under $2 and a lot were penny stocks under $0.50.

Even with gold up 600% from the 1971 low of $35 to the 1975 top of $200 most gold and silver shares did little to make anyone wake up and take notice. Please remember that we were in a severe Bear Market throughout most of 1973-1974 and keep that fact in mind when the general market sells off. I worked for Dominic & Dominic at the time and the President was one of the worlds Biggest Gold Bulls who became famous for going to Japan and selling them Gold. I held a few seminars in an attempt to push Gold stocks as well as Bullion as the best way to make money in a falling market but getting an order was like pulling teeth. It was not until gold retraced its first big sell-off and got back above $200 did the gold and silver stocks started there historic bull market that would end at un-imaginable prices.

Some examples were: Lion Mines - 1975 price $0.07 / 1980 price $380! -- YES that's right, it's not a misprint you could of bought 10,000 shares of lion mines in 1975 for around $700 dollars - and if you held on for the whole 5 years until January 1980 you could have netted a total profit of around $3,799,300. Not bad hey!!!!! A few others were Bankeno - 1975 price $1.25 / 1980 price $430. Wharf Resources - 1975 price $0.40 / 1980 price $560. Steep Rock - 1975 price $.93 / 1980 price $440, Mineral Resources - 1975 price $.60 / 1980 price $415 . Azure Resources - 1975 price $0.05 / 1980 price $109

No question about it…that was one of the biggest financial opportunities in history. I don't know of any other time, not even the dot.com bubble (how may of us could get in on the IPO's anyway) where in only a 5 year time span you could have turned so little money into so much wealth. "You only need to make one good investment decision in your whole life to be super successful". I believe we are now at that same juncture as we were in 1976-78, but only this time the fundamentals are even better for gold and silver than they were back then.

The similarities between the 1970s and today are uncanny. See if you can find a copy of James Dines prophetic classic "The Invisible Crash" known then as the "Gold Bugs Bible". The book is basically a documentary case study of the stock and gold markets of the 1960's to mid 1970's. The things that Mr. Dines wrote about back then could have easily been written last week or talked about on MSNBC yesterday. Here are a few quotes A full-fledged panic away from paper money could start at any moment". Or how about this nice quote. "When people see gold and silver standing alone amidst the economic ruins, they will realize that we gloom and doomers were actually right". "Too much paper has been printed in the past, and will have to be wiped out no matter what." "People say gold is useless. Not true. It is demonstrating its function right now for all to see. Gold is the ballast for the monetary printing press and gold will relentlessly punish all offenders" The list of timeless quotes goes on but I will leave you with one last quote that is very relevant to today's problems in the U.S dollar and the so called economic rebound. "It's beginning to dawn on some people that to defend the dollar and avert a dollar crisis, U.S interest rates will have to go up; . However, if interest rates go up sharply it will choke off not only our economy but will surly burst the Real Estate Bubble as well. What a dilemma!"

The similarities between now and then are simply uncanny. All of these quotes tell the real story of why gold (and silver) were so important throughout history.

History Repeats but never in an identical fashion so that it is not recognizable until only after the fact. These quotes are the real fundamental cornerstone of why gold is in a bull market today and why the current rally in the general equity markets is only a bear market rally based on near record low interest rates, (that can't last), several tax cuts and the FED flooding the world with fiat dollars!

Now that the Fed is being forced to raises interest rates, to save the dollar among other reasons; the stock markets, bond markets, housing markets and credit markets and finally the oil market will, shortly begin to implode once their respective breaking point are reached. For your own information I recommend you also read "The Dollar Crisis" By Richard Duncan. "Balance of Payments Deficits of an unprecedented magnitude have resulted in credit induced economic over heating on a global scale. The foundations for sustainable economic growth will not be restored until this flaw is corrected and the U.S. trade deficit ceases to flood the world with liquidity. The only ammunition the FED has to stop the coming decline in the U.S. dollar is to raise interest rates. But if they raise rates too fast they will cause a simultaneous crash in multiple markets (stock, bond, housing, credit). Greenspan is attempting to create a soft landing by raising rates before he is forced to. So along with raising rates Greenspan is also pursuing a policy of loose money hence his Conundrum. Greenspan has painted himself and the world into a corner that I believe we will not be able to get out of with a lot of pain.. Investing in gold and silver shares and the physical metal now and holding them for the next 3-5 years could be the only major financial decision you may ever have to make in your entire life. No need to trade in and out. Just buy some stocks now, add to you positions on any short term sell-offs and wait until you see headlines in the newspapers similar to the one that I opened this essay with. Or scale into any precious metals mutual fund. Remember, when that front page story which ran in January 1980, most gold and silver stocks were trading over $50 per share, and lots were trading over $100 -$200 some even as high as $500 per share when only a few years earlier you could have bought the same stocks quietly for a $1 or $2. As of now I don't know of even one gold or silver stock that is anywhere close to trading at over $100 per share.

I know it's hard for most people to think that gold and silver will surpass their old January 1980 highs, but that is what a 20+ year generational bear market will do to a whole new generation of investors, who have grown up with falling real assets (gold, silver and commodities) and rising paper assets (stocks and bonds). When the tide of human emotion swings and paper assets really start to fall hard, the lust and fervor for real assets will be unbelievable. The Dot Com bubble will look like small potatoes compared to some of the up coming gains in the first gold and silver bull market of the 21st century. But unlike the dot com bubble that was based on easy financing, unrealistic dreams of profits aggressive accounting and pure greed, the coming explosion in gold and silver stocks will be all about supply and demand and a object FEAR to protect one's savings from paper destruction combined with GREED to get in on a sure thing. There is nothing that can stand in the way of a combination of GREED and FEAR.

TOTAL EQUITY OF ALL GOLD STOCKS

When the entire world wants a piece of the gold and silver bull market they will discover that there is only a relatively very limited supply of shares, and you can't create a gold mine out of thin air like you could a Dot Com company. The combined total of all gold stocks is less than that of the equity of IBM. Yet it is estimated that there is over $2 Trillion in Hedge Funds alone. Can you imagine what happens if suddenly they wake up and begin a rush to Gold. There are over 8,000 mutual funds that have not even looked at gold -- and yet they have a mandate to be fully invested. What do you think they will do when the only stocks going up are gold and silver stocks?

The gold and silver stock sector is very small compared to the bond and stock markets -- and it won't take much buying, percentage wise, to push these stocks into the stratosphere. I am sure that most of you have friends that can't name even one Gold stock; But I'm also sure that in 3-5 years they will be touting you about the latest hot gold new issue coming out of Vancouver, or Alberta even though they don't know where Vancouver or Alberta are. That will be the first major sign that the top is near…

I firmly believe that the opportunity in gold and silver and the companies that mine them, may be presenting a once in a lifetime opportunity, where even a modest investment today could change your financial destiny.

NEAR TERM OUTLOOK

"Plain and simple; Gold Shares usually lead Gold Bullion both up and down. Check out their respective Charts. Gold Shares look to me like they have already bottomed and have begun the first leg of the next stage of the ongoing Bull Market". This is an excerpt from my July letter where I anticipated that gold was "still in its consolidation phase, but was nearing completion of what in my opinion, using Elliott Wave analysis, was a declining a,b,c,d,e, wave (4) triangle. My best guess then was that the low (if it has not already been made) would be in the $410 to $420 area", "you can wait for a confirmed low in B.llion if it will make you feel more comfortable, as long as you are prepared to pay 20% to 50% more for your favorite gold stocks, once Gold Bullion breaks out to new recovery highs" WELL ARE YOU ALL PREPARED TO BUY YET?. It takes guts to stand alone against the crowd, but that's what you have to do if you want to make real money. Who among you can really expect to do better than to get in within 5%- 10% of the beginning of the next major move? However since we are still very early into the biggest GOLD BULL MARKET to come in history and if sleeping better is more important to you, than wait for Bullion's conformation of its resumed bull market and then buy. WELL WE JUST BROKE OUT TO NEW HIGHS. Be careful not to let buying the stocks at new breakout highs stop you. Just treat them like Investors Business Daily and a host of other analysts have been treating all new breakout highs for the last ten or fifteen years.

Aubie Baltin CFA, CTA, CFP, Phd. (retired)
Palm Beach Gardens, FL

26 November 2005

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Also by Aubie Baltin

July 12, 2010 | Unregistered CommenterVincent Brenneman

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