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The time to invest in gold stocks is fast approaching.
Thanks to a major surge in the U.S. dollar over the last few months, combined with a general market sell-off and a triple bottom in gold, gold stocks have taken it on the chin.
But for die-hard contrarians, it's just the right time to act.
Gold Stocks Are in the Doldrums - but They Won't Stay There
Gold stocks are hurting right now. The Market Vectors Gold Miners Fund ETF (NYSE Arca: GDX), a proxy for the gold mining sector, is down a crushing 74% since September 2011.
In the last few months, a surging U.S. dollar and strong stock market have put additional pressure on gold and gold miners.
The long-term chart of the HUI NYSE Arca Gold Bugs Index (which GDX seeks to replicate) shown below indicates that we are currently at levels not reached since May 2003 - more than 11 years ago!
Now, let's put that into perspective.
In May 2003, gold traded at a paltry $355. By late October 2008, gold had more than doubled to $720, and that was the low in the midst of the extreme sell-off that occurred when the financial crisis was in full gear.
Today, gold trades at $1,145, a full 120% higher than in May 2003.
And yet gold stocks have fallen back down to 2003 levels. Gold is up nearly two and a half times since 2003, yet gold stocks have not gained any ground.
Can this last? In a word, no - it can't. As a rule of thumb, gold stocks offer about a 2-for-1 leverage on the gold price.
But right now gold stocks are so hated that they'd need to gain about 150% on average just to regain a reasonable valuation versus gold. And that's conservative.
So here's what to look for when investing in gold stocks...
Watch for GDX (trading over $17 right now) to regain the $20 level on a sustained basis and start to trend higher. Also, watch gold prices. You'll want to see the price steady and, ideally, rising.
You might give up a little upside from here, but GDX trading at $20 will bring some assurance that it has left behind its low and has regained upward momentum.
And that's the time to invest in gold stocks - because they'll be heading higher from there.
Editor's Note: Gold and silver typically grab all the attention, but there's another metal that could blast past both of these, virtually overnight. It has unique physical properties for which there is just no substitute. It's 15 times more rare than platinum, and 30 times more rare than gold. Here's why it's time to buy the precious metal that's primed to double...
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