What Will Happen to Gold Shares in a Crashing U.S. Stock Market?
By Doug Casey
As some of you probably already know, there are a multitude of reasons why I
believe the broader stock markets are about to meet a financial Freddy Krueger.
I won't repeat myself here, other than to say that we are fast approaching the
point at which the U.S. government will have to choose between crushing
hocked-to-their-eyeballs American consumers by continuing to increase interest
rates (a rock) in order to keep the dollar attractive to the foreigners who lend
U.S. markets about $2 billion per day... or letting the dollar tank (a hard
place), triggering all sorts of fiscal unpleasantness.
Rarely is predicting the future anything more than a self-conceit or a ready
topic for cocktail chatter; there are simply too many variables to allow for
accurately predicting anything more complex than what time your alarm clock will
go off in the morning.
Even so, predicting the coming financial crisis is a relatively straightforward
affair, made so by the fact that it is now unavoidable. The only question is how
bad it will get. And it could get extremely bad... especially when you throw in
some of the other wild cards - which these days could be anything from a serious
spike in energy prices... an upwards revaluation of the Chinese renminbi... or
another major terrorist attack.
Given that less than rosy view, it is no wonder that I am so bullish on gold and
silver... and especially the high-quality gold and silver stocks we follow in
the International Speculator, which offer the best leverage. In the last,
discovery-led, gold-share bull market in the 1990's, even run-of-the-mill gold
stocks went up by 1,000%, 2,000%, 5,000% -- all while gold prices stayed flat.
This time around, gold is running up concurrently with a still emerging string
of mining discoveries, so the returns on quality gold stocks should be even
better. Already, we are regularly pulling down doubles and triples -- but the
best is still ahead.
Or is it? After all, gold stocks are stocks, and so it's logical that they would
get dragged down when the general stock market tumbles. Right?
Let's put that notion to the test.
As you can see from the chart below, the idea doesn't hold up. Gold stocks
largely march to their own drummer, sometimes in the same direction as the
broader stock market, but sometimes distinctly contrary to same. Yet it is true
that the strongest moves in gold stocks have occurred when the general market,
as well as gold, was moving up (1971-73, 1983-1983, 1985-1987, 1993-1996).
[CHART: investorsinsight.com]
Notable in the chart is how much more volatile the gold stocks are - which is
good if you are willing to accept the higher level of risk in exchange for
higher potential return. It is also a good reminder that these things are not
heirlooms, but rather more akin to burning matches; when you get a big profit,
be sure to sell at least enough to get your original investment off the table.
The other thing to note, which is especially relevant to the topic of this
article, is the price action of gold stocks during the dotcom bubble and the
following collapse, generally reflected in the period 1995 to 2000.
At the time, of course, no one wanted to hear about something as archaic as
precious metals, the ultimate tangible. Instead, intangibles were all the rage,
though even that seems too tame a word. As the chart shows, precious metals
stocks went down, down, down as the dotcoms went up, up, up. But then when the
cyber-bubble burst, gold stocks started their rise.
While the broader stock market has since recovered, it is a recovery built on a
fantasy of easy money and debt. When that fantasy ends, it will be gold and
silver stocks that are left standing.
If you haven't yet built your portfolio of precious metals stocks, don't put it
off. Something brutal this way comes. It will either run you over or make you rich.
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DOUG CASEY is the author of Crisis Investing which spent 26 weeks as #1 on the
New York Times Best-Seller list. He is also editor and publisher of the
International Speculator, one of the nation's most established and highly
respected publications on gold, silver and other natural resource investments.
Doug has made himself and his subscribers millions with his in-depth research,
right-on perceptions and contrarian attitude. To learn more about becoming a
subscriber to the International Speculator, click here:
investorsinsight.com
Company Address:
Casey Research
10000 North 31st. Ave.
Suite C-102
Phoenix, AZ 85051 |
