The time to invest in gold stocks is fast approaching.
Thanks to a major surge in the U.S. dollar over the last few months, combined with a general market sell-off and a triple bottom in gold, gold stocks have taken it on the chin.
But for die-hard contrarians, it’s just the right time to act.
Here’s why…
Gold Stocks Are in the Doldrums – but They Won’t Stay There
[ad#Google Adsense 336×280-IA]Gold stocks are hurting right now. The Market Vectors Gold Miners Fund ETF (NYSE Arca: GDX), a proxy for the gold mining sector, is down a crushing 74% since September 2011.
In the last few months, a surging U.S. dollar and strong stock market have put additional pressure on gold and gold miners.
The long-term chart of the HUI NYSE Arca Gold Bugs Index (which GDX seeks to replicate) shown below indicates that we are currently at levels not reached since May 2003 – more than 11 years ago!
Now, let’s put that into perspective.
In May 2003, gold traded at a paltry $355. By late October 2008, gold had more than doubled to $720, and that was the low in the midst of the extreme sell-off that occurred when the financial crisis was in full gear.
Today, gold trades at $1,145, a full 120% higher than in May 2003.
And yet gold stocks have fallen back down to 2003 levels. Gold is up nearly two and a half times since 2003, yet gold stocks have not gained any ground.
Can this last? In a word, no – it can’t. As a rule of thumb, gold stocks offer about a 2-for-1 leverage on the gold price.
But right now gold stocks are so hated that they’d need to gain about 150% on average just to regain a reasonable valuation versus gold. And that’s conservative.
So here’s what to look for when investing in gold stocks…
A Crash Bigger than 2008 Watch the full presentation.
Watch for GDX (trading over $17 right now) to regain the $20 level on a sustained basis and start to trend higher. Also, watch gold prices. You’ll want to see the price steady and, ideally, rising.
You might give up a little upside from here, but GDX trading at $20 will bring some assurance that it has left behind its low and has regained upward momentum.
And that’s the time to invest in gold stocks – because they’ll be heading higher from there.
— Peter Krauth
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Source: Money Morning