Gold has risen steadily since the start of 2009, when it was trading at a bit less than $900 an ounce.
And gold's advance has accelerated of late. The price of gold increased 21% in the year's first half.
Many investors and investment pundits are claiming this gold-plated party is destined to end: When the Eurozone gets its house in order and our elected leaders in Washington finally reach a federal budget accord, these gloom-and-doomers say, the price of gold will plummet.
But I say they're wrong.
Gold isn't going to crash. In fact, it isn't even going to hold steady at current levels.
The price of gold is destined to soar through the next six-to-nine months.
I'd say that we're actually looking at $5,000 by 2015.
And I'm going to show you the best way to hitch a ride on this rocket.
The Bright Side to Global Debt Fears
I've been analyzing gold miners and other natural-resources investments for a long time. Now, when I'm analyzing precious-metals-related investments for a Money Morning column, or for the subscribers of my Global Resource Alerttrading service, there are certain financial indices that I like to study. And I especially like to see how each of these indices behaves against the others.
One of the most valuable – and telling – of these relationships is the one that compares the price of gold to the U.S. Standard & Poor's 500 Index. To make this comparison, I use two exchange-traded funds (ETFs) as "proxies" – stand-ins – for each of these investments. The SPDR Gold Trust (NYSE: GLD) represents the price of gold and the SPDR S&P 500 (NYSE: SPY) serves as a proxy for the broad stock market.
If we look at what has happened over the past six years, the trend is undeniable: Thanks to the U.S. Federal Reserve – first because of aggressive rate-cutting by former Fed Chairman Alan Greenspan, and then due to the massive debt expansion engineered by successor and current Fed honcho Ben S. Bernanke – gold is in a clear uptrend.
We all know that U.S. stocks endured a horrific freefall in late 2008 and early 2009 – only to launch into a "V-shaped" recovery that turned into one of the most powerful bull-market rebounds in U.S. history. But if we factor out that dizzying whipsaw move, the bottom line is clear: Despite Bernanke's unbridled money-printing, U.S. stock prices arelower today than they were back in 2007, when the global financial crisis began.
And this woeful period for U.S. shareholders has been very bullish for gold investors.
Even more interesting – and bullish – is how gold has reacted to bear-market moves for stocks: During the most-sizeable share sell-offs, we saw strong surges in the price of gold.
Why is that bullish?
It's actually quite simple.
Governments around the world have taken on massive amounts of debt. That's not a problem that can be solved overnight. And the longer it takes to fix, the greater the odds that we'll see a sovereign-debt default with fallout far greater than anyone now expects.
As we've seen recently, just the fear of a sovereign-debt default is enough to tip stocks into a nosedive.
And any such nosedive will clearly be good for the price of gold, which will power higher in the very midst of sizeable stock sell-offs.
In the very near term, if governments are able to allay debt fears, we could see a period of "consolidation" for gold prices. But there's no way to eradicate all this debt in a short period of time. That means this issue will resurface again and again.
Long-term, the global sovereign-debt crisis will be very bullish for gold.
It will also be bullish for a small percentage of smartly placed stocks. To learn about one such stock, click here for our latest special presentation.
Stocks Dive – Gold Thrives
As we saw, there's a relationship between stock prices and the price of gold that gives us a way to predict just where the "yellow metal" may be headed.
And now that gold is on the rise, investors have a lot of options when buying into the yellow metal: Miners, ETFs, physical gold, certificates. One of these will give investors the best return on their investment. But which one?
One of my favorite value measures can help investors determine which type of gold investment is the "best buy". It's a useful ratio calculated by comparing the relative value of gold versus gold stocks.
And this ratio tells us that gold stocks are currently a very compelling value.
Let me show you why.
The Looming Surge in the Price of Gold
As a proxy for gold stocks, the AMEX Gold Bugs Index (AMEX: HUI) does nicely.
In the years leading up to the stock-market panic of 2008-09, the gold-to-gold stocks ratio hovered in a range of 1.7 to 2.2. That meant that an ounce of gold typically bought you about two units of gold-mining stocks. At the peak of the financial crisis, an outlying surge took that ratio all the way to 4.76. Essentially, the bear-market sell-off made gold stocks very cheap on a historical basis relative to gold. And that set up a tremendous buying opportunity.
In fact, it was the best buying opportunity since this secular bull was launched in 2000.
But here's where it gets really interesting. After bottoming this spring, the Gold/HUI ratio surged up to 3.0, making gold stocks much cheaper relative to gold, which has been unwilling to give up much ground from the $1,500 per ounce level. Gold stocks hadn't been that cheap since April 2009 – when they went on to gain 82% in just eight months.
Currently – even with the price of gold hitting record highs – the Gold/HUI ratio is only at 2.8 (see the preceding graphic). Given the likelihood that this ratio will begin reverting back to its long-term level near 2.0, we have the right ingredients in place for a follow-up surge in gold stocks to play out during the next six to nine months.
The One Move to Make Now
It's always possible that gold could fall, which would help the ratio correct back toward 2.0, without as much of a gain required from gold stocks.
But given the forward-looking fundamentals underpinning the price of gold, I'm not expecting much weakness. That's why I am bullish on gold stocks right now.
So what's the right move, you ask?
The simplest way to gain exposure to gold stocks is by adding the Market Vectors Gold Miners ETF (NYSE: GDX) to your portfolio. GDX is a great way to invest in the AMEX Gold Bugs Index I described earlier. This ETF is composed of the world's largest and most-liquid gold and silver mining companies. It averages about 10 million shares in daily trading, and has a reasonable management expense ratio of 0.53%
So as you look for compelling value from the marketplace in this "risk-off trading" environment, keep in mind that gold stocks are about as attractive as they've been in more than two years.
Those are pretty sweet odds.
Don't let them pass you by.
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About the Author
Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.