If you’ve been patient, congratulations…
It wasn’t an easy wait. But that wait is now paying off…
[ad#Google Adsense 336×280-IA]We finally have another great opportunity to buy gold stocks.
Regular readers know that many of my colleagues and I believe we’re in the early stages of a big bull market in precious metals.
As interest rates around the world drop into negative territory – or even simply stay below the rate of inflation – folks will become more interested in owning assets that don’t bleed value like cash.
Historically, they’ve turned to gold and silver to fill that role.
The bull market has already started… And it could send the prices of gold and silver beyond their 2011 highs. That means at least another 44% increase for gold and another 151% for silver.
When gold and silver prices rise, gold and silver stocks tend to rise even more. So far, gold and silver are up 26% and 42%, respectively, off their December lows. Gold and silver stock indexes are up 137% and 199%, respectively, off their January lows.
If you’re looking for wealth protection, the physical metals are the way to go. (And I suggest everyone with savings own physical metals.) If you have some money available for speculations, though, gold and silver stocks are a great choice.
Lots of folks were caught flat-footed by the rapid rise in gold and silver stocks. Maybe they didn’t buy anything before the initial pop higher. Then, they couldn’t bring themselves to buy after such a big, rapid move. Or maybe they simply didn’t buy enough.
If you fit into either category, you’ve likely been waiting for a significant correction… for just the right moment to buy, with less risk.
As I’ll show you today, we’re now in the thick of that correction. The chart below shows the last year of action for the long-standing NYSE Arca Gold BUGS Index. After rocketing 182% higher, it’s now down 16% from its peak. (Last week, it was down as much as 22%.)
You may be asking, “How do we know the correction is over?”
The answer is, “We don’t.” In fact, I think there’s probably more downside ahead. But we can now begin to structure gold-stock trades with relatively low risk…
You see, there have been two bull markets in precious metals – and gold stocks – since the Gold BUGS Index was created in 1994. There was one from November 2000 to March 2008 and one from October 2008 to September 2011.
Here’s a breakdown of the number and size of the corrections in each bull market…
If this gold-stock correction is as bad as the worst one in either of the past two bull markets, the Gold BUGS Index will drop another 24% from here. That’s not too bad. And if this bull market turns out to be as big as the smaller of the last two (a 319% rise), the index will climb another 133% from here.
A long-term chart helps tell the story…
The opportunity you have offers a relatively low downside and a triple-digit upside. That’s why today, I suggest you start buying or adding to your gold stocks…
For now, I prefer sticking to a diversified gold-stock fund, like the VanEck Vectors Gold Miners Fund (GDX). You can also look at the big names… like $22 billion producers Newmont Mining (NEM) and Barrick Gold (ABX), or $14 billion producer Goldcorp (GG). They’re the largest gold miners in the world… And they have positive cash flows. Their stocks will likely be less volatile than those of smaller, less established companies.
By going with GDX or one of these stocks after a significant correction, you reduce the risk you’ll stop out of your trades if you use appropriate stop losses…
The largest corrections of the past two bull markets were about 36%. So if you use that as your worst-case scenario, you can choose a stop loss accordingly.
As I said above, the Gold BUGS Index is now down 16% from its recent peak. So for it to match its previous worst corrections, it would need to fall another 24%. If you use a 25% stop loss on a fund like GDX or one of the big names above, that’s a good margin of safety.
If the sector does continue lower, you can start looking to add more volatile stocks (with even more upside) to your portfolio. These may include junior gold miners or silver producers, for example.
Another good strategy to weather the likely volatility would be to buy partial positions today. Then, if prices head lower, you can add to those positions.
Either way, if you’ve been waiting for an opportunity to buy gold stocks, I don’t recommend waiting around for what you think is the exact bottom. It’s nearly impossible to get that type of call right… And you risk missing out on the great opportunity you have right now.
Good trading,
Ben Morris
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Source: Growth Stock Wire