It’s Time to “Back up the Truck” and Buy Gold Stocks

By Justice Litle

If there were ever an occasion to “back up the truck” and buy gold stocks, it is NOW.

As legendary commodity analyst Don Coxe observed, “The greatest
investment opportunity comes from an asset class where those who know it
best love it least.”

This applies to gold stocks, which have been falling in the last 16 months for the following reasons:

1. Perception of a housing-led US recovery
2. Perception of crisis containment in Europe
3. Perception of subdued or repressed inflation
4. Poor management of gold mining companies
5. Competition from US equities.

This spells a major opportunity. Because each of these five
factors is now not only “priced in,” but also in the process of
reversing.

First, positive news on the housing front has led to strengthened belief in a US economic recovery.

The problem is we are headed toward not just a housing recovery, but a new and dangerous housing bubble — engineered by the Fed and large private equity firms.

And once the market gets a whiff of the inflationary and disruptive
implications of this bubble, perceptions toward gold with shift
dramatically.

Second, the perception of crisis containment in Europe has been a major weight on gold and gold stocks.

In 2012, Mario Draghi unleashed a deluge of optimism by saying the
ECB was ready to do “whatever it takes” to save the euro. This calmed
markets with the illusion of stability.

But events in Italy and Cyprus
will shatter that illusion. The turmoil of Italian elections and the
horrible mismanagement of the Cyprus bailout are both major
foreshadowing events for what awaits the euro zone.

Third, it is widely believed that inflation has been tamed — naturally bearish for gold and gold stocks.

The main official measure the Fed watches, CPI-U, has not been
registering increasing inflation pressure. But this will remain the
case only as long as monetary velocity — which measures how fast money
moves through the system — and bank lending remain subdued.

And that is not likely to remain the case. Because either perception
of US economic recovery will persist and cause a pickup in spending
and bank lending (and, therefore, inflation). Or fear of the Fed
overshooting on its policy near-zero interest rates and debt
monetization will ignite a 1970s mentality of “spend it now” ahead of
big price rises.

Fourth, gold stock valuations have been greatly compressed by gross misuse of cash flow.

Gold mining companies have long been known for their terrible
management — everything from badly judged acquisitions of new mines…
to botched hedging strategies that wipe out positive exposure to the
gold price… to paying nosebleed prices for takeovers of competitors.

But even the hardheaded management teams can learn. And pessimism
has driven valuations to rock-bottom levels, even as managements have
promised to go to the equivalent of Alcoholics Anonymous — call it
“Acquirers Anonymous” — to stop throwing money away on bad projects.

Fifth, gold stocks have suffered on a relative basis as
institutional capital piled into more conventional areas of the US
equity market. Health care, retail and housing-related stocks have done
exceptionally well in the past months… again, based on perceptions
of US recovery.

But now those areas of the market are overbought and overvalued, as gold stocks scream value and bargain-basement prices.

It is rare to see so many macro factors converge like this in favor
of one area of the market. I recommend you “back up the truck” now
ahead of gold miners’ big move higher.

You can add exposure to gold miners through the Market Vectors Gold Miners ETF (NYSE:GDX).

Carpe Divitiae,

Justice

P.S. I am in the process of putting together an emergency special report for Strategic Wealth Report readers detailing the ONE blue-chip gold stock you should play right now…

If you would like to receive this special report — along with a
recommendation as to how to play it via long-term options — keep your
eyes on your inbox next Monday morning. Because, as a loyal Inside Investing Daily reader, you’re entitled to a complimentary copy. So keep your eye on these pages…