And there was the mainstream thinking that gold was dead.
They had it written off.
Yet there it is. It’s back from the dead.
Not only that, but it’s thriving. It’s as though it has a new lease on life.
So what’s next? Is this the end of the rally? Or will it fall in a heap again…just like it did in June?
Here’s our take…
We’ll be straight up with you.
This latest gold rally has taken your editor completely by surprise.
We admitted as much yesterday to our old pal, Sound Money, Sound Investments editor Greg Canavan. Greg says it’s great to see that gold is doing what it’s supposed to do – move in the opposite direction to the stock market.
That fits in with Greg’s view of the market right now, which is that stocks are on the verge of a big drop.
This ‘gold up and stocks down’ relationship isn’t necessarily what happened for much of the previous five years. For much of the time stocks and gold rose and fell in unison.
But now the real reason for owning gold has returned. It’s not about trading gold like a share, it’s about the safety of owning gold while world leaders crank up the volume on war…
Gold Doing What it Does Best
You have to remember a key reason why gold rises during war times. It’s not just because people are worried that all the bank notes and coins will disappear.
It’s because historically governments tend to ramp up the printing presses during a war in order to pay for the war. Doing so naturally devalues the currency already in circulation. And that should mean a higher gold price.
So in a way, it’s good to see the gold price rallying so strongly in recent weeks. Contrary to the idea that gold was dead and buried, it’s doing exactly what it’s supposed to do. That’s good news.
Source: Goldprice.org
It’s why we recommend investors own a significant amount of gold. It’s to protect your wealth and investments against the war talk and printing presses of war mongering governments (US, UK, France and Australia).
But the mainstream didn’t just prematurely consign gold to the rubbish bin. Most folks had figured resource stocks would never recover either…especially gold stocks.
Gold Stocks Beat Gold
If you think gold has done well, climbing $150 (about 10%) in just a couple of weeks, gold stocks have done even better.
As you can see on the following chart, the Market Vectors Gold Miners ETF [NYSE: GDX] has gained 21.1% during the same time – twice the performance of physical gold.
And if you think that’s good, the Market Vectors Junior Gold Miners ETF [NYSE: GDXJ] has added 34% – three times the performance of physical gold:
Gold ETF – red line; Gold Miners ETF – blue line;
Junior Gold Miners EFT – yellow line
Source: Google Finance
However, we need to make one thing clear. Buying physical gold and gold mining stocks isn’t the same thing.
In fact, they’re at the polar opposites of investing. Physical gold isn’t about getting rich. Physical gold is about protecting your wealth from government meddling. You should own physical gold.
You may have 10%, 20% or 30% of your wealth in gold…or perhaps more.
Gold stocks (or any mining stocks) are about speculating and growing your wealth. They’re about placing small bets on the off-chance you could bag a big triple-digit percentage gain.
For gold stocks I doubt if you would have more than 10% of your share portfolio in a number of stocks. An individual gold stock may account for no more than 1-2% of your total wealth.
The thing is, you don’t need a big exposure to gold stocks because of the potential to make super-sized gains.
Of course, the other reason you shouldn’t have a lot of your money in gold stocks is that you can lose money too. The Market Vectors Junior Gold Miners ETF has fallen 43.5% over the past year, and was down as much as 62.5% in June.
Don’t be a Fool
Look, as we wrote in Monday’s Money Morning, the recent resource stock rout has similarities to the dotcom boom and bust in the early 2000s, and the recent tech stock recovery.
When stock markets boom, investors make a lot of bad investments. They don’t buy a stock because it’s a good stock, they buy it because other stocks have gone up and they believe their stock will go up too.
But when the boom ends, they soon sort out the good stocks from the bad stocks.
That clear-out has happened to resource stocks in recent months. The market has punished those companies that had little substance to them.
And this won’t be the end of it either. Investors will be more cautious about where they put their money. That will be bad news for the stocks with little to no genuine prospects. But it will be great news for the genuine explorers and producers.
Just as investors shifted towards the quality tech stocks in recent years, so they’ll shift towards the quality resource stocks in the coming months.
That’s already started to happen. Just as those who thought 2001 was the end of the tech boom look foolish today, those who say this is the end of the resource boom will look just as foolish 10 years from now.
Cheers,
Kris+
From the Port Phillip Publishing Library
Special Report: Panic of 2013
Daily Reckoning: Dodgy Market and Dodgy Federal Reserve Chairman Candidate!
Money Morning: The Bull in the China Shop
Pursuit of Happiness: Have You Put Your Portfolio on War Alert?
Australian Small-Cap Investigator:
How to Make Big Money from Small-Cap Stocks
