Time to Board the Gold Stocks Train?

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by Jeff Clark: The
2010 Silver Buying Guide

One of the
big hints that gold stocks will be ready for take-off is when they
stop following the broader markets and strictly track gold, particularly
if the market falls and gold stocks don’t. We now have data
showing this has just occurred.

From April
2009 to April 2010, gold stocks mirrored the S&P. The two markets
held hands as often as high school sweethearts; there was very little
separation between them. While it wasn’t always a daily connection,
any weekly and especially monthly chart showed them moving in tandem.

Until now.

For the quarterly
period of April through June, gold stocks advanced 11%, tracking
gold’s gain of 10.7%. The S&P, however, lost 14.1%.

We haven’t
seen this level of separation between gold stocks and the general
stock market since the first quarter of 2009. This demonstrates
obvious strength in our sector, and is precisely the kind of action
that can signal we’re getting closer to our precious metals
investments starting a major leg up.

In the big
picture, this data should be considered a short-term indicator.
However, it’s a refreshing reminder that at some point, it
won’t matter what the broader markets are doing. In the precious
metals bull market of the 1970s, the Barron’s Gold Mining Index
soared 652%, while the S&P gained only 22% for the entire decade.
This means that if you’re bearish on the economy, you don’t
have to be bearish on gold stocks.

Whether this
is the beginning of permanent separation or not, the following chart
tells us the stock market, in relation to gold, is going one direction.

At gold’s
bottom in April 2001, the Dow/Gold ratio (DJIA divided by gold price)
was 41.2. It now stands at 7.9 (as of July 2).

When gold peaked
in January 1980, the Dow/Gold ratio reached “one,” meaning
they were both selling for about the same price. To hit that same
ratio today, gold will have to go higher and the Dow simultaneously
lower. The fundamental reasons gold will rise are far from over,
and a second leg down in the broader markets seems almost locked
in at this point.

In this context,
Doug Casey’s call for a $5,000 gold price doesn’t seem
so farfetched. It also coincides with his call for a Greater Depression,
an environment not exactly suited for higher stock prices. $5,000
gold = 5,000 Dow.

Where do you
think they’ll meet – three? Eight?

This has obvious
implications for your investments. If you’re investing for
the big picture, you first want to think twice about any conventional
stock investment. You might even consider a short position on one
of the indices, something without a time limit, such as an inverse
ETF.

Second, you
should plan on higher gold prices. While pullbacks are inevitable,
it does mean that even if you don’t own gold yet, it’s
not too late. In fact, any excuse you have now for not buying gold
will seem shallow and meaningless when the dollar begins cratering
and so does your standard of living.

Third, don’t
shy away from gold stocks. Yes, they’re still stocks and thus
vulnerable, and we’re not sure the separation is here to stay,
but selling your core holdings would be, in my opinion, a mistake.
One of these days gold stocks won’t wait around for you to
jump back in. And you could find yourself chasing them, a tactical
error for the investor looking to maximize profit from what we believe
will be a once-in-a-generation bull market.

In fact, if
you had followed only this strategy since the precious metals bull
market began in April 2001, you’d be up 375% in your gold holdings
and up 707% in your gold stocks. An investment in the S&P, meanwhile,
would’ve returned you exactly zero.

It’s our
opinion this trend will continue. Gold stocks could very well get
cheaper in the short term, handing us an excellent buying opportunity.
But in the big picture, they’re destined for much higher levels.

My advice is
to make sure you’re on the right side of this trend.

What’s
a good price on gold, silver, and precious metals stocks? We’ve
charted every summer pullback in prices since the bull market began
in 2001, giving us target zones for every asset in our portfolio.
Our Summer Buying Guide is an invaluable resource for identifying
a good bargain in our industry. And you can access it right now,
for $39 per year, with a risk-free 3-month trial. Click
here for more.

July
10, 2010

Jeff
Clark is editor of Casey's
Gold & Resource Report
in Casey’s Daily Dispatch.

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