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Gold stocks: Next 121% rally starts today
2/14/2012 12:11:11 AM | Brett Eversole, DailyWealth
3445 Reads | 11 Comments

Gold equities are bouncing off one of their lowest valuation levels ever

You should consider buying gold stocks right now... 

The opportunity is just too good to pass up. The last time these particular conditions came together, gold stocks rallied 121% in 12 months. 

Let me explain the opportunity... 

Typically, if gold goes up, gold stocks move even higher. And if gold goes down, gold stocks fall even more. 

But during 2011, that relationship broke down. Take a look... 

http://images.dailywealth.com/images/gld%20vs%20gdx.png 

The chart shows the price of gold in black and gold stocks in blue. You can see that in 2009 and 2010, gold stocks performed as expected... They tracked the price of gold, but with more volatility. 

But as you can see, that relationship fell apart in 2011... Last year, gold moved higher for the 11th straight year, gaining 10%. But gold stocks actually fell 16%. 

Part of the reason was that gold stock investors were skeptical of the "good times." They didn't figure gold's price gains were sustainable. The other problem for gold stocks was that they're stocks. In a volatile market, when stocks in general are falling, gold stocks will fall, too... even if the gold price is rising.

Because gold stocks fell and gold rose last year, they are seriously cheap today... 

We have two simple ways to track "value" in gold stocks. The first comes from legendary resource investor John Doody. 

John's track record speaks for itself. From 2001 to 2010, a portfolio of his picks gained 1,360%. The stock market returned just 15% during the same period. 

In his Gold Stock Analyst newsletter, John tracks a simple "overvalued/undervalued" metric for gold stocks. As of the latest issue of his letter, John's measure shows gold stocks are 17% undervalued. We saw a similar reading in September. Back then, gold stocks jumped 20% in a few weeks. 

Another simple way to size up gold stocks is through the ratio of gold to gold stocks. Take a look... 

http://images.dailywealth.com/images/gold%20stocks%20value(1).png

 When the ratio of gold/gold stocks is low, gold stocks are cheap compared to the price of gold. 

Right now, gold stocks are bouncing off one of their lowest valuation levels ever. The only time gold stocks have been cheaper based on this ratio was late 2008. Back then, shares of GDX (the big gold-stock fund) jumped 121% in 12 months. 

Right now, gold stocks are near-record cheap. And it looks like they're starting to once again keep pace with the price of gold. So far this year, gold is up 11.4% and gold stocks are up 9.8%. 

This is just the beginning. I expect there's much more to come.
ABOUT THE AUTHOR
Brett Eversole, DailyWealth

DailyWealth is free daily investment newsletter focused on the best contrarian investment opportunities in the world. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments. http://www.dailywealth.com/

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Comments
frankseles5
Energy Demand Predictions Shows 53% of Future Increase Will Be China & India With China Demanding 68% More Energy Then U.S. IRAN/ OIL /FOR GOLD IS GOOD...... FOR GOLD!
frankseles5
China will have 220 cities with more than 1 million inhabitants by 2025. Explosive Growth is Spectacular With a Robust Rise of the Middle Classes Leading the Way in Brazil, Russia, India & China simple way to size up gold stocks is through the ratio of gold to gold stocks. is also Explosive Growth in the middle class!
frankseles5
Impending Doom/Wars = $50,000 Gold? Iran, Gold and Oil ??? and size up gold stocks is that there dirt cheap!
frankseles5
..Iran, Gold and Oil ???
lilbugger2
I don't understand - "The chart shows the price of gold in black and gold stocks in blue. You can see that in 2009 and 2010, gold stocks performed as expected..." This is opposite what the chart says - the price of gold in blue and gold stocks in black........does this mean that gold stocks are expected to decrease 121%.....who proof reads this fluff????
frankseles5
With us Social Security, civilservice and military pensions, the Pension Benefit Guarantee Corporation, Medicare and Medicaid are over the $100 trillion mark...GOLD is Dirt..cheap!
frankseles5
United States External debt as % of GDP 101.1% As U.S. Debt Rating Agency Cuts to Double-A-plus from Triple-A according to the Treasury Department. Debt service costs will climb to 82 percent of the $757 billion shortfall projected for 2016 With the worldwide population expected to exceed seven billion in 2011,lets hope there is gold stocks in there portfolios!and GOLD IS CHEAP!
frankseles5
Cost of U.S. Wars Since 2001 $1,302,250,192,781 U.S. SPENDING PROJECTIONS THRU 2055 AS REVENUE THEN WON’T EVEN COVER DEBT INTEREST COSTS GOLD IS CHEAP!
frankseles5
China’s economy: $123 trillion, 3 times America’s by 2040 per capita income will hit $85,000, more than double the forecast for the European Union … China’s share of global GDP— 40% — will dwarf that of the United States 14% and the EU 5% 30 years from now one brief generation. China’s political system is more capitalist than America’s as China is rapidly turning into a capitalist consumer economy. China’s massive investments in education,and is resulting in the next generation of China’s high school enrollment rate reaching 100%, and the college rate hitting about 50%.
frankseles5
China’s locking up global resources, using U.S. dollar reserves and China’s quietly buying up future rights to commodity-resources worldwide. China’s rural economy of 700 million adding to growth rate as China’s government statistics China’s Economy Growing to $123 Trillion, or Three Times America’s by 2040: Global Share of GDP at 40% Dwarfing the US at 14% and EU at 5%
frankseles5
Almost 17 million barrels a day of oil flowed through in 2011, roughly 35% of all seaborne traded oil, or almost 20% of oil traded world-wide. Last year, 14 crude oil tankers a day passed through on average. More than 85% of these exports went to Asian markets. The strait is 21 miles wide at its narrowest point, but its shipping lanes are only two miles wide, separated by a twomile buffer zone. It is still deep and wide enough to handle the worlds largest crude oil tankers, with about two thirds of oil shipments carried by tankers in excess of 150,000 deadweight tons. Closure of the strait and a War WITH IRAN GOLD $50,000 STARTS at any time!
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