- Money Morning Australia

Why You Should Buy ‘Dirty, Grimy’ Gold Stocks


Written on 17 April 2013 by Dr. Alex Cowie

Talking <b>gold stocks</b> can be a lonely business. And after gold’s biggest tumble in over thirty years, talking about gold stocks just got a whole lot lonelier...

Hello…

Is there anyone out there?

Just checking…talking gold stocks can be a lonely business at the best of times.

And after gold’s biggest tumble in more than thirty years, talking about gold stocks just got a whole lot lonelier…

Here’s how bad it is: the Gold Miners bullish percentage index just crashed to ZERO.

That’s the first time that’s happened in five years. Statistically there is not even a glimmer of love for gold stocks. Gold equities are officially at the point of maximum capitulation.

If that’s not enough to tempt your inner contrarian to rummage for bargains in the dumpsters…then I don’t know what is…

If sifting through dumpsters isn’t really your style, please let me pitch contrarian investing to you from a different angle.

A Reliable Signal for Gold

This chart shows how when the gold miners bullish percentage index (red line) crashes as it now has, it reliably predicts major upward moves in the gold stocks.

The Ultimate Contrarian Signal to Buy Gold Stocks…?

I’ve circled in green to show how the low values for the bullish index precede significant rallies in the market vectors gold miners index (GDX), which measures a basket of small, mid, and large-cap gold stocks listed around the world.

But go back to late 2008. You’ll see I’ve put a rectangle to highlight when it last actually got down to zero.

The last time it hit zero, which is where it sits today, it marked a point where gold stocks started their transformation from pariah to the new must-have investor accessory.

This metamorphosis was born in the deepest scepticism, as bull markets always are. From this unlikely start, the market vectors gold miners index (GDX) went on a three-year bender that saw its value TRIPLE.

And of course that’s just the average across a whole selection of stocks. Many individual gold stocks saw far bigger gains than that.

Investing in this stuff takes guts. If you’re looking for a nice, reliable 6% yield … this ain’t the right game for you. This is a play for the battle hardened, high-risk-high-reward investor.

In the recent words of my colleague Dan Denning:


Bring it back to simple big picture fundamentals. And as a stock picking exercise, you can always bring it back to Rick Rule’s basic premise of natural resource investing: you’re either a victim or a contrarian. Victims are attracted by high or rising prices and speculate on them. Contrarians are attracted by dirty grimy things in the gutter that no one else wants and can be bought cheaply.

There’s no denying that today, gold stocks are certainly in the ‘dirty grimy things in the gutter’ category.

I’ve found (through experience) that in terms of after-dinner conversation, gold stocks currently rank alongside hearing about Aunty Mildred’s recent bowel operation.

It’s so tough to find willing listeners, that a major Australian gold conference was just cancelled for the first time in history due to lack of takers.

Now is the Time to Act

Gold stocks are a tough sell all around. But the irony is…this is exactly what makes now the right time to start looking.

Now I’m not saying that gold stocks couldn’t fall further still. But after the last few days of historically wild market action, if we haven’t seen the bottom yet, then we’re as close as dammit to it.

Of course, we first need gold to lead the way. Yesterday, gold guru, Marc Faber said:

I am happy we have a sell-off that will lead to a major low. It could be at $1400, it could be today at $1300, but I think that the bull market in gold is not completed. All I’m saying is that I think we’re going to have a major low in gold in within the next couple of weeks.

It may have happened already. Gold has bounced $50 in the last 24 hours. The traders that shorted gold on Monday will need to cover their trade soon, which could generate a strong rally in itself. Still, I’d expect a few more twists and turns to this story. A bounce is rarely as simple as all that. Volatility is the order of the day.

Gold is understandably getting all the attention, but…

What About Other Precious Metals?

Take palladium for example.

Palladium fell by a comparatively ‘modest’ 10%.

It’s not a precious metal you hear about very often, but is worth putting on your radar as it is facing one of the most fundamentally bullish set ups I’ve ever seen.

The palladium market is small. This table shows the value of palladium’s annual supply is just $35 billion.

Compare that to platinum’s which is ten times bigger, at $294 billion…

Or gold’s which is over three hundred times bigger at $10 trillion.

Palladium: the Metal Version of a Microcap Stock

When the fundamentals stack up for microcap stocks, they’re capable of phenomenal moves as the market charges in to take a slice of the action, driving up the price quickly. You want to get in before that happens!

And palladium is the precious metal version of a microcap. It’s a tiny market, and when investors start looking for exposure, the price could move sharply higher.

It’s not just that it’s a small market. The fundamentals look excellent for palladium. One third of supplies comes from Russian stockpiles – which are about to run out; and a third comes from South Africa – from which supply has flat-lined and no increase is on the cards for years. Meanwhile demand is rising strongly. It’s a rocket waiting to take off.

Mark my words that palladium is a precious metal to keep an eye on. So while commentators focus on gold in the coming weeks, make sure you also keep an eye on the 10% sale going on in palladium!

Dr Alex Cowie
Editor, Diggers & Drillers

Ed Note: After the big hit taken by gold and gold stocks in recent days, your instinct is probably to buy gold stocks. There’s nothing wrong with that. But in today’s Money Morning Premium, Kris looks at another hot set of resource stocks that are set to rebound too…click here to upgrade now.

From the Port Phillip Publishing Library

Special Report: TORRENT SIGNAL 3

Daily Reckoning: Trees Don’t Grow Gold

Money Morning: Why this Historic Fall in the Gold Price Equates to a Historic Opportunity

Pursuit of Happiness: The Definition of a Stockbroker…

Diggers and Drillers:
Why You Should Invest in Junior Mining Stocks


Leave a Comment

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.

If you would prefer to email the editor, you can do so by sending an email to moneymorning@moneymorning.com.au


Categories | Gold Stocks

TESTIMONIALS

"I think you're fantastic! I love to read what you write...you're so interesting and amusing and I've learned so much" -
Money Morning reader, Chris Gadd

"You guys are brilliant. I feel more relaxed about the future than ever simply because I know what is going on rather than floundering around with smoke screens and mirrors from the government and mainstream" -
Money Morning reader, Helen Carter

"Wow what can I say? I was an economically confused moron until I read your newsletter and even though I've been a subscriber for a short period I can now see how easy it is to understand, if you use common sense and can have the spin translated into everyday language. Thanks for an entertaining read." -
Money Morning reader, John

"Keep up the good independent and well thought out articles offering a view that often debunks mainstream myths." -
Money Morning reader, Craig

"I do admire your straight talking and simple analysis of the situation, I think of you as the Jeremy Clarkson of finance." -
Money Morning reader, Jeffery

openX sidebar signup form
Openx pos2
Latest Stock Market Updates
  • ^NDX4251.324+9.233 - +0.22%
  • ^FTSE6750.76+71.86 - +1.08%
  • ^AORD5343.500+51.400 - +0.97%
  • ^AXJO5356.300+52.000 - +0.98%
  • AUDUSD=X0.8686
  • USDJPY=X117.906
openX sidebar banner
Openx pos7
Iron ore leadgen
WWD dvd

World War D was billed as ‘the biggest investment summit of the decade’

It didn’t disappoint…


Absolutely mind-blowing beyond my expectations

– D.A.C. Hall


The BEST INFORMATION available,
contrary to mainstream economic reporting.

– L. Sceresini


Exciting, dynamic, passionate, informative, challenging, so professional... Brain-stretching.

– D Finlay


Click here to watch
the brand new Highlights Reel.

Blue Chips

Receive our unique and useful investments ideas straight to your inbox for FREE, enter your email to sign up:

x