From the start of the new millennium, gold has been rising against unbacked government-issued currencies (aka “fiat”).
It hasn’t been a straight shot higher. But the trend is clear.
The following chart shows the exchange rates of gold and major fiat currencies going back to 2001.
You can see gold has been rising in value versus its fiat counterparts.
And as we showed you yesterday, there’s another reason you want to own gold…
The monster gold rally that’s on its way.
Yesterday, we showed you why you should own some physical gold first. Today, we’re going to focus on how you can supercharge your gold gains with gold mining stocks.
It’s trounced stocks. The S&P 500 – our regular stand-in for the U.S. stock market – is down 0.5% over that time.
But that’s nothing compared with the gains for gold mining stocks.
We’ll use the VanEck Vectors Gold Miners ETF (GDX) as our proxy. It tracks the performance of 44 top global gold mining stocks.
As you can see, GDX is up 56% over the past 12 months. That’s two times more than physical gold.
This is what makes them so attractive as speculations on a rising gold price.
Leverage is Wall Street-speak for extra oomph.
When the gold price goes up (or down) by 1%… gold mining stocks tend to go up (or down) by more than 1%. Sometimes a lot more.
Gold mining companies have a fixed cost to mine. It doesn’t matter if gold is selling at $1,000 or at $1,500 an ounce… miners’ costs stay the same.
If a mining company is mining gold at $900 an ounce… and the gold price is $1,000 an ounce… the company books a profit of $100 an ounce.
But if the gold price climbs to $1,500, the company now books a $600 profit. That’s a 500% jump in profits for the mining company, even though gold went up only 67%.
E.B. heads up our Strategic Investor and Strategic Trader advisories.
He’s also a gold industry insider… and an expert on the gold market.
E.B. is on the board of a fast-growing gold mine financing company. And before joining the team at Legacy Research, he comanaged a fund that invested in gold mining stocks.
And E.B. reckons we’re still in the early part of the gold cycle. As he put it yesterday…
The most important thing to understand about gold is it’s a cyclical market. When gold was at $1,900 an ounce back at its peak in 2011 you had Mr. T doing gold commercials. You had “Cash for Gold” signs everywhere. Those were overenthusiastic conditions.
At the bottom of the market, you have the opposite. You have guys who have been in the business for decades saying there’s no way any price jump is real.
And despite the recent gains, that’s where we are now. The guys running the leading gold mining companies are demoralized. They’re beaten. They just can’t believe the gold rally is real. Fear is still the dominant emotion. So now is the time to make your investment in gold… and sit tight.
E.B. says the first move is to buy physical gold. (If you haven’t already read yesterday’s dispatch, catch up here.)
Once you own some bars or coins, you’ll also want to make some smaller speculative bets on gold mining stocks.
Take a look at this next chart. It’s of the last three gold booms. And it shows the rise in the gold price versus the average share price rise for gold mining companies.
As you can see… during the 1979-1980 gold boom, physical gold soared 214%. But gold mining stocks shot up 323%.
Then, in the 1990s, gold climbed 8%. The average gold mining stocks climbed more than 200%.
And from 2001-2006, the average gold mining stock gained more than 400%… as gold climbed 158%.
It’s why he’s been urging readers of our Strategic Investor advisory to buy best-in-breed gold stocks.
As he explained it…
Physical gold is money. You don’t speculate with physical gold. You’re not buying it to see a huge appreciation and then sell again.
Physical gold – bullion or coins – is money you own and trade for whatever you need. It’s a good form of money to own on your personal balance sheet because it’s not someone else’s promise to pay.
Mining stocks, on the other hand, are speculations. They’re moonshots. They give you leverage to the gold price. You see explosive moves higher in gold mining stocks when the gold price is climbing.
E.B. recommends individual gold stocks at Strategic Investor. If you’re a paid-up subscriber to that letter, you can catch up on the full details of E.B.’s model portfolio here.
The most popular way is through the VanEck Vectors Gold Miners ETF (GDX).
As we mentioned up top, it holds shares in 44 top global gold mining companies.
This is the easiest alternative to picking individual gold mining stocks. It’s not the perfect play, because not all the companies it tracks are best-in-breed. But it will give you broad exposure to rising prices in gold mining stocks.
Regards,
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Chris Lowe
August 29, 2019
Lisbon, Portugal