You Want Proof the Stock Market’s Heading Up? Try This…

Is that it?

Is the Cyprus crisis over?

That seems to be the message coming out of Europe…or not.

If it is over, it means you can rest easy now…until the next crisis hits.

In last Friday’s Money Morning we explained why it’s a mistake to sell this stock market. In fact, we laid it on the line and told you to buy this market.

Today, we’ll give you another reason, and provide ‘proof’ that despite the talk of crisis, this is the best time to buy a certain class of stocks…

Our old pal, Diggers & Drillers editor Dr Alex Cowie, spent last week mixing it up with the resources elite at the Hong Kong Mines & Money conference.

As you may have read in the reports he sent back, he’s as bullish as heck about the prospects for gold and gold stocks. And he’s not the only one.

One of the keynote speakers was gold and silver investing guru Eric Sprott. The Doc sat down with him on Friday morning to chew the fat over the commodities markets, and especially gold.

As Alex wrote on his Google+ page over the weekend:

‘I spent the whole morning today with Eric Sprott, who manages an $11 bil precious metals fund, and he was kind enough to do a half hour interview with me at the end.


‘It was a cracking interview and I’m relieved as all hell that he agrees fully with me that gold stocks are on the verge of massive moves.’

We hope to get excerpts of the Doc’s chat with Eric Sprott to you as soon as we can.

This Stock Market: Buy When No One Else is Buying

To be honest, the Doc’s views on gold played a big part in our decision to tip two gold stocks in the March issue of Australian Small-Cap Investigator…the first time we’ve tipped a gold stock in more than two years.

One of the clinchers was a nifty little chart the Doc included in his presentation at the Hong Kong Mines & Money conference:


Source: Diggers & Drillers


As you can see on the chart, the Doc circled periods when the stock market has reached extreme pessimism. At those points, the gold price has sold off and mainstream commentators have run up the flag announcing the end of the gold bull market.

Only, each time they’ve gotten it wrong. Gold has continued to rally, and while we’re not convinced gold will take out the all-time high this year, you won’t find us betting against gold finishing the year in the black.

Looking at the chart it seems as though the Doc has missed out a few other times when gold has dipped as pessimism has taken hold.

To our mind, this chart is as good as proof that gold is about to march higher. It’s already gained USD$40 since the start of March. That was when plenty of folks said the gold price had started a precipitous fall.

There’s More to High Stock Prices
Than High Commodity Prices

However, the gold price isn’t the same as gold stocks, as the following chart demonstrates:


Source: Google Finance


The blue line is the SPDR Gold Trust (ETF) [NYSE: GLD], which tracks the US dollar gold price. The red line is the Market Vectors Gold Miners ETF [NYSE: GDX], which tracks a range of small, medium, and large gold stocks.

As you can see, since 2006 the GLD has gained 169%, while the GDX has gained just 10.6%.

You’ll note that both ETF’s tracked each other until global markets started to crash in 2008. Then they diverged. Why? This goes back to what we wrote in the March issue of Australian Small-Cap Investigator.

A rising commodity price is only part of the equation when it comes to rising stock prices. You also need two other parts: economic growth (especially in China), and credit expansion.

You’ve had both of those to some degree. China is still growing by about 7.5% per year. And central bank money printing has created some credit expansion. Trouble is, neither have fully filtered through to all parts of the economy.

So at the moment the stock market is lacking a key fourth factor: confidence.

And it’s pretty hard for confidence to take hold when governments worldwide are looking at any way possible to get their mitts on private savings – taxing bank accounts and nationalising retirement accounts.

Not the Time to Sell

But as bad as that all sounds, we believe an epic bull market run is on the cards. With the stock market recently trading at its highest point since 2008, thanks largely to gains by dividend stocks, our analysis tells us that investors will soon start putting their money to work in a different type of stock – growth stocks.

That won’t happen overnight. And it may not even happen within the next few months (that’s why you’ll see a lot of volatility in dividend stocks as they range between ‘expensive’ and ‘cheap’).

But based on what we’ve seen of the stock market’s behaviour here and overseas, it’s only a matter of time before the epic bull run begins.

Commodity prices are high. The Chinese economy continues to grow. And credit markets continue to recover and expand. That’s pretty much the three ingredients that caused the stock market to boom from 2003 to 2007.

All that’s remaining is investor confidence. But if you think back to that time, you’ll remember that investors had the confidence knocked out of them more than once during that four year run, and yet stocks gained 127%…more than doubling the performance of the Dow Jones Industrial Average.

If we’re right, we’ve barely begun this bull run, and it’s only a matter of time before growth stocks lead the stock market higher. As we said last Friday, this isn’t the time to sell stocks…it’s time to buy.


Join me on Google+

From the Port Phillip Publishing Library

Special Report: Australia’s Energy Stock BLOWOUT

Markets and Money: The Global Property Obsession Continues

Money Morning: Mountains of Natural Gas and Oceans of Sunlight

Pursuit of Happiness: The Bright Side of the Cypriot Banking Crisis

Australian Small-Cap Investigator:
How to Make Money From Small-Cap Stocks

Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.

Leave a Reply

Your email address will not be published. Required fields are marked *

Money Morning Australia