Sunday, December 7, 2008
Gold stocks - back to basics
Gold and gold stocks are counter-cyclical performers. When times are bad/hard/scary, this is usually the time when gold and/or gold stocks outperform. During heavy inflation, gold stocks have trouble making money because their costs are usually going up as fast as the price of the product they sell, and physical gold will often perform nearly as well as gold mining stocks do. During a deflationary or contractionary period, gold miners start to make money hand over fist because the gold price falls much less quickly than the costs of mining do and mining stocks outperform the physical bling bling.
Examples in history confirm this. Everyone is talking about the Great Depression these days, which as an investor, conjures up the worst bear market in the last 100 years: 1929-1932. Let's see how a blue chip mining stock performed while the Dow Jones lost 90% of its value (chart stolen from gold-eagle.com):
A more recent wicked (50% loss in S&P 500) bear market was in 1973-1974. Well, not if you were in gold stocks (chart stolen from analyst extraordinaire Frank Barbera, who wrote one of my all-time favorite "big picture" gold stock articles):
How about the more recent and quite wicked 2000-2003 bear market (50% haircut in the S&P 500 and a gut-wrenching 80% in the NASDAQ)? The $HUI or gold bugs index is an index of gold mining stocks (red and black squiggles with prices on the right of the chart, versus the black line for the S&P 500 with prices on the left of the chart):
Let's also not forget where we are using our road map, the Dow to gold ratio:
Lastly, the fundamentals for gold stocks are outstanding. Look at the gold price divided by the oil price (energy is a major cost for miners):
I think the next leg up in gold stocks will be a game changer for those with the courage and conviction to buy now and hold for several years:
The fundamentals are strong, the technicals indicate a great buy point (remember that whole "buy low and sell high" thing works if done correctly) and history tells us it's a good time to own gold and gold miners. Have you bought some GDX and a little physical gold as portfolio insurance yet? It's not too late, but don't let this one get away from you!