Wednesday, October 29, 2008

The swinging pendulum in history

GoldMoney. The best way to buy gold & silver
Below is a table I created to show a rough estimate of returns for gold stocks versus the Dow Jones Industrial Average during recent periods in history. These periods correspond roughly with long-term (i.e. secular) bull and bear markets in general stocks. Homestake Mining was a long-time blue chip gold miner that merged with Barrick Gold Corporation (ticker symbol ABX) in 2001 and serves as a reasonable proxy for the gold mining sector during the final 70 years of the last century.

These returns are somewhat idealized, as no one can pick the exact top and bottom for a long-term bull move. These returns also ignore dividends and inflation, which are NOT negligible when calculating long-term returns. But the basic concept is well illustrated: when the general stock market takes a dump for 10-15 years, gold stocks are a good place to be. Conversely, when times are good and general stocks are doing well, gold stocks are a crappy investment.

What about the 2000-2008 time period? Using the the ticker symbol GDX, which is an ETF (like a mutual fund) that represents a basket of gold mining companies (with a few silver miners thrown in), the idealized return from the low in 2000 to today's close is 320%. For the Dow, from the high in 2000 to today's close gives a return of -23%. Quite a difference, eh? Not only that, but we have just undergone a wicked correction in gold stocks, while the crash in general stocks is just a hint of what's to come.

From here on out, gold stocks are going to start significantly outperforming general stocks and dividends for gold stocks are going to start increasing rapidly over the next few years. Buy gold stocks now and hold for several years (but not forever!).
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