After the Correction: Gold Stocks Set for the Biggest Gains

Don’t look now…but gold stocks are soaring!

Maybe my screen’s upside down…

No, that’s not it. Maybe gold stocks really are going up after all!

Since I wrote to you last week explaining why gold stocks had bottomed, the All Ords Gold Index (XGD) is up by 9%, and the Market Vectors Gold Miners index (GDX) is up by 12%. 

Many stocks have fared much better. Northern Star (NST) is up by 28%, Troy (TRY) is up by 16%, and Beadell (BDR) is up by 20%. 

These are impressive short-term moves, and are a clear signal to sit up and pay attention. And if you thought you may have missed the boat, think again.

This is just the beginning…

In a nutshell, the reason I called a bottom last week was that the market was so universally negative on gold stocks that sentiment had hit zero.

And from there, it’s basically impossible for things to get any worse. To quote the famous market analyst Bob Dylan, ‘When you aint got nothing, you got nothing to lose.’ 

This is precisely why when sentiment bottoms out, a new bull market starts. 

One week later, and it already looks like it’s game on.

A big part of this is the recovery in the gold price.

‘Recovery!?’ I hear you say.

Yes.

No one seems to have seen what has happened since gold copped it in April with its biggest fall in 33 years.

At the time I wrote to you saying the historic fall in gold spelt a historic opportunity for you. And since then it has seen an incredible bounce. Thanks in part to the gold price and in part to the falling Australian dollar, gold in Aussie terms has jumped 14% in just six weeks. 

In fact, the bounce has been so big that Aussie dollar gold is nearly back to where it was before the once-in-33 year crash.

Aussie Dollar Gold – 85% Recovered from the Crash Already


Source: StockCharts

A reader, Pat, took our advice and was kind enough to email after the crash to say:

‘Nailed It! All the graphs show we were just off the bottom…you can have a day off from banging the gold drum because someone heard and took action!’

That’s so great to hear, thanks for that Pat.

I expect that gold stands to rise further.

But I think gold stocks are the next shoe to drop.

They are only just starting to play catch up now. Some very interesting signals have come out of the gold sector. For one thing, over the last week, they have gained faster than gold. In other words, they have provided leverage.

Once upon a time, that’s what investors bought gold stocks for. If gold looked like going up 5%, a good quality gold stock could go up 10%, 15%, or 20%. But it hasn’t worked like that for a long, long time.

So it was interesting to see gold stocks actually outperform the gold price in the last week. This chart shows the ratio of the gold stock index (GDX) to the gold price. When gold stocks are giving leverage, this ratio rises.

Gold Stocks Giving Leverage? Next Thing We Know Flares Will be Cool Again



Source: StockCharts

What really catches my eye in this chart is the fact that not only is this ratio rising, but it has poked its head above the 50 day moving average (blue line) for the first time in six months, and has actually held there. This is the first bullish sign from this chart in a long time. I’d keep a close eye on this.

Just two weeks ago, George Soros, one of the world’s most famous, experienced and wealthiest investors, made a massive bet on gold stocks. I wrote to you about how in total he now has a quarter of a billion dollar bet on gold to go up.

When players like him get involved, it’s often well worth punting alongside them. So far it’s paying off.

But that doesn’t mean all gold stocks will go up. It’s a market of stocks, not a stock market after all.

Warning: Quality Varies Wildly

Many of these gold stocks are running dangerously low on cash. So that’s the first thing look at when thinking about a stock.

To find out a company’s cash balance, I read the quarterly reports. It’s certainly not a pastime for adrenaline junkies, but it is essential. I recently read over five hundred of them, to find the most cashed up stocks on the market.

The findings were surprising. Although most stocks were running on fumes, there were also quite a few stocks with at least a few years-worth of cash.

This is so important because if they have enough cash in the bank while capital markets are tight, they can just get on with business. They can also buy their competitors for peanuts.

Three stocks in particular passed the cash test, and a host of other screening tests I use, so I tipped them in the latest monthly issue of Diggers and Drillers.

These break a six month patch in which I only tipped two stocks. That tells you how dangerous the market has been until now.

Like gold stocks, the entire resource space has been very weak, but after a very long rough patch, the mining sector looks to be on the rebound.

In fact, I’m increasingly convinced we’ve seen the low point in the resource market. Resource stocks should see good gains from here. And I’m not the only one to think this way. Controversial analyst Phillip J Anderson believes commodity markets are only half-way through a 30-year bull market cycle.

Anderson says all markets, including property and stock markets, move in long cycles. If Anderson is right (and I think he is) 2013 could be the best opportunity to buy resource stocks in more than 10 years.

And as gold is the most oversold of all the resource stocks, good quality gold stocks stand to make investors the biggest gains of them all.

Dr Alex Cowie
Editor, Diggers & Drillers

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