Sunday, May 31, 2009
How to get rich in the stock market over the next decade
Buy and hold a basket of Gold mining stocks or buy a Gold stock mutual fund or ETF (like GDX). There's only one catch, and it's a minor one: you should wait until the price comes down from current lofty levels.
Gold stocks are a good countercyclical asset to own, meaning they tend to do well when general stocks are doing lousy. Well, most of us already know that general stocks are doing lousy (other than the past two months). This can be seen in the table below, using Homestake Mining (now part of Barrick Gold Corporation, ticker ABX) as a proxy for the Gold mining sector:
Keep in mind that the table above ignores dividends and inflation, which are absolutely NOT trivial. But the general point is that when stock markets do lousy for a decade or more, Gold stocks tend to do well and vice versa. This point can also be made in graphic form by comparing long-term charts of U.S. Gold mining company stocks to general U.S. Stocks (i.e., Dow Jones Industrial Average), as the chart below stolen from Gold technician Frank Barbera demonstrates:
I believe we have started a deflationary economic depression, but Gold stocks can do well during heavy inflation or heavy deflation, as the data above shows. In other words, whether you believe we are headed for a rhyme of the 1930s or the 1970s, Gold stocks are a safe bet to prosper as general economic activity sputters. With unemployment skyrocketing, the housing crash nowhere near a bottom and the U.S. debt load reaching levels that seem impossible, it's a safe bet that traditional stocks will be a lousy investment for at least the next few years (short-term rallies aside).
The current bull run in Gold stocks is near complete and those looking to enter this sector should "sit on their hands" and be patient, as another buying opportunity will be here soon enough. Those in general stocks have a great opportunity to sell at the current levels and escape the next brutal wave down in general stocks, which will make lower lows than those seen in March. This capital can then be re-deployed into the one sector of the economy poised to make an historic bull run over the next decade or so.
The fundamentals for the Gold mining sector are superb as the Gold price is holding firm near its all-time highs while the costs of mining are declining. This fundamental back drop is best exemplified by the ratio of the Gold price to the price of a basket of commodities, which is a crude measure of miner profitability. For example, energy costs are significant for Gold miners. This ratio provides an estimate of the "real" price of Gold and the higher the real price, the higher the miners' profits. Below is a monthly chart of the Gold price divided by the CCI Commodity Index ($CCI) showing how crude Gold miner profitability (all other things being equal) is now higher than at any point in the past 20 years:
This alone indicates that Gold stocks should move back up to and exceed their previous highs. But even better is the fact that this ratio is about to start moving even higher, which will really get investors' attention as Gold miner profits are getting ready to explode to the upside. Below is a shorter-term 1 year daily chart of the Gold to CCI ratio:
When this ratio explodes to the upside again, the increase in profits that will occur for Gold mining companies currently in production will be dramatic. Gold stocks, like every sector of stocks, are not immune to getting caught up in downdrafts created by strong downward plunges during general stock bear markets. However, Gold stocks are in a strong new bull market and every correction that occurs in this sector will simply be another buying opportunity. While general stocks will be lower one year from now than they are now, Gold stocks will be much higher one year from now than they are today.
This Gold stock bull market is young and fresh and the largest gains are by far ahead rather than behind us. The current positioning of Gold stocks is much like Internet stocks in the early 1990s - it's that big of an opportunity. I, for one, intend to be along for the ride.