A Simple Strategy — Buy Gold Stocks!
My thoughts are simple right now. Buy gold stocks!
Why? Gold is holding above US$1,700 over in the US.
A slightly lower Aussie gave it a little more kick for us last week. It’s now back to $2,269 per ounce.
I expect money to keep flowing back into gold equities after their bloodbath over the last eight months or so.
Where else in the market can you get discounts of 30–50% on businesses still minting money? Drop me a line if you know another sector like that.
The backdrop still looks good for gold in the medium to long term.
Inflation expectations are rising across the world. We can see that playing out in the bond market right now.
And the central banks have shown that there are now no limits — political or economic — to how hard they can run the printing press.
Gold may not be the perfect inflation hedge. But it’s a hard asset and demand should hold.
Go back to 26 February. That was a hard day down on the ASX and formed the recent ‘low’ in the market at around 6,777.
Analysts attribute that sell-off to the rapid uplift in bond yields.
Now, here’s the interesting thing…
On 1 March the Gold Bugs Index [NYSE:HUI] over in the US bottomed out. It’s since risen 12%.
Gold itself didn’t bottom out until 9 March.
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The gold bug index holds companies that are exposed to the short-term gold price.
This would suggest the market — at least as measured by this index — saw a bullish case for gold before the price turned.
We are also seeing big Aussie gold producers round a corner, in terms of price action.
Silver Lake Resources Ltd [ASX:SLR], just to pick one example, is up over 20% in the same time frame.
My friend and colleague Greg Canavan tweeted the following on 26 February:
Greg also noted that this meant the market was pricing in the notion that gold earnings were at a cyclical high.
That presents the opportunity! If gold goes higher from here then the fantastic earnings the gold stocks have now will continue.
Gold stocks could surge if this plays out as expectations around gold shift in a powerful way.
No guarantees but this looks a great risk versus reward opportunity. Why so?
Gold stocks are already down big time since the high last year. That means a lot of bad news is built into their prices already.
The big drop around late Feb also looks like a big capitulation puke from weak hands.
The stage is set for a rebound. It would take a big hit in the gold price to send them down another big leg.
That doesn’t mean it can’t happen. Your money is always at risk in the market. But the upside looks very good if gold rallies from here.
And if it does nothing? Most likely gold stocks will trek sideways.
I’m OK with my money going sideways if the opportunity is worth it. I’m not OK with my money going down.
But gold stocks look a very reasonable trade here, from both a long- and short-term perspective.
Remember each big gold producer in Australia has an undercurrent of strong earnings right now. Most of them have big cash hoards too after the bonanza of the last few years.
Put this in the context of the wider market. There are not many sectors showing much sign of life at all.
Your best chance of some action in the short term is in gold stocks, going off my take.
That’s if you’re into short-term trading. And for the longer investor, the value showing in gold producers has to be compelling. Just go back to Greg’s tweet above.
I do hope you consider this strongly. Last year everybody wanted to barge into the gold sector. Now people are deserting it.
I know when I prefer to buy in…when the stocks are cheaper! My overall risk is lower that way.
The good thing about the Aussie gold sector is you can salt and pepper things to your taste here.
You have a beast like Northern Star Resources [ASX:NST] at a $12 billion market cap. But there are gold producers in the mid- and small-cap space too.
There are few names I trust more around gold than my colleague Greg either.
We’ve worked together since 2012. He was analysing the gold sector then and, as you saw above, is still doing it now.
Editor, The Daily Reckoning Australia
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