In San Diego last week, I spoke to nearly 500 readers. Down in the Exhibitor’s Hall, where the coin dealers set up, I heard readers ask one question more than any other…

“What’s YOUR favorite way to buy gold?”

I thought it was a silly question. Why? You don’t want to ask a gold coin dealer about his favorite way to own gold… That’s a bit like asking a barber if you need a haircut or asking an insurance salesman if you need more coverage.

Before you take advice about how to own gold, consider where the advice is coming from and if the adviser has a vested interest in what he’s recommending.

[ad#Google Adsense 336×280-IA]Me? I have no vested interest. I’m not looking to sell you a gold coin, or a gold bar, or a gold stock. I work for you.

My job is to find you the best opportunity. And the way I define that is: What investment has the maximum upside potential with the minimum risk?

Before I answer, I need to start by saying that gold is not in an asset “bubble.” Yes, it has gone up a lot. But it’s not like real estate in 2006… So far, everyone is NOT in the trade… yet.

When gold reaches the peak of a bubble stage (and it will at some point), investors will be clamoring for gold stocks, particularly the smaller ones. Gold stocks will soar hundreds of percent from their current levels.

So far, investors haven’t cared one bit about gold stocks… Gold stocks have performed poorly compared to gold in this gold bull market. The underperformance has been incredible…

Over the last three years, the price of gold is up over 60%… But gold stocks (as measured by the big gold stock fund GDX) are up less than 20%.

Traditionally, gold stocks are about twice as volatile as the price of gold. If gold goes up 10%, gold stocks go up 20%. If gold goes down 10%, gold stocks fall 20%. The relationship has been so reliable historically, you could practically set your watch by it.

But over the last three years, instead of gold stocks soaring twice as much as gold – which would put them up 120% or more – they’re barely up at all.

In my new True Wealth Systems trading service, we track gold stocks in a variety of ways. The simplest way to size up gold stocks is versus the price of gold. And there’s an easy way to trade it: Buy low and sell high… Buy when gold stocks are cheap compared to gold and sell when they’re expensive.

Right now, gold stocks are nearly as cheap as they’ve been in the last 40 years. Take a look:

This chart isn’t complicated. The black line is the price of gold stocks. (If you want to track it at home, it’s the XAU Index, extended backward historically with data from The blue line is the ratio of gold to gold stocks.

As you can see, gold stocks have been cheap by this measure a few times in history, and those were all great times to buy gold stocks. Today, they’re still cheap…

When the gold bull market really hits a bubble, these things will likely go nuts, especially the smaller ones.

We’re not there yet. And importantly, this is not a free ride higher… If gold falls, these could really get hurt. Gold stocks are extremely volatile, and smaller gold stocks will be even more volatile. Also, you want to be certain you have a basket of these, not just one or two.

If you can’t stomach a 50% fall on the path to potential hundreds of percent gains, you should consider standing aside. Or better yet, consider the EverBank CD I recommended yesterday, where your upside potential is limited to 50%, and your downside is basically zero.

But I believe one of the best opportunities (with the biggest upside potential relative to the downside risk) is in gold stocks.

Good investing,

— Steve Sjuggerud

P.S. In True Wealth Systems, we keep a close eye on Gold/Gold Stocks Ratio… When our strategy says “buy,” we make 31% a year on average. Those gains will be many times greater if we end up in the peak stage of a gold bubble. To learn more, click here.

Source:  Daily Wealth