My favorite gold stock “value” indicator is flashing BUY right now.

The last two times this happened, gold stocks doubled in eight months or less…

This indicator is simple at its core. But it takes some work to put it together. Fortunately, my friend John Doody does the work for us…

[ad#Google Adsense 336×280-IA]John’s excellent gold stock value indicator is a feature of his newsletter, The Gold Stock Analyst.

John’s indicator essentially looks at two things…

  • How much gold do you have in the ground?
  • How much gold are you producing?

John has determined the “fair value” of these things for his universe of gold stocks, relative to the price of gold. When investors get too excited about gold stocks, they trade at a premium to John’s fair value. When investors are down on gold stocks, they trade at a discount to John’s fair value.

And the indicator works…

Gold stocks last traded at a big premium to John’s fair value in October 2007. The indicator was right: Gold stocks fell 50% over the next year.

By October 2008, gold stocks were cheap by John’s indicator… And they more than doubled in seven months. Right again. (The previous time gold stocks were particularly cheap by John’s indicator was back in March 2003… Gold stocks doubled in eight months.)

Last week, I saw John Doody at a conference in Pennsylvania. He told me gold stocks are darn cheap once again relative to their fair value.

It makes sense… Since the beginning of May, gold stocks have tumbled, down by double-digits in percentage terms. Meanwhile, the price of gold is up (just barely).

So gold stocks are now cheap once again.

It’s the third-cheapest they’ve been since 2003. The other two times gold stocks got cheap like this, they doubled in eight months or less.

Of course, I can’t guarantee a double in eight months this time around… but history is on your side here, based on the best gold stock valuation indicator I know.

The simplest way to buy gold stocks is through GDX, a basket of big gold producers.

Gold stocks are a great value. Trade accordingly.

Good investing,

— Steve Sjuggerud

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Source:  Daily Wealth