Gold vs. the Stock Market
- A tough question for your mutual fund manager
- Three Charts You Shouldn't Miss
- The best potential in the market today
If you were wise enough to buy stocks during the lows of 2009, you're probably feeling pretty good about your decision. Even if you just bought the S&P 500 SPDR (NYSE: SPY), which precisely tracks the total return of the S&P 500 index, you're up over 20% over the past year. That's huge.
Ask any mutual fund manager if they can replicate 20% annual gains in their fund and they might have you forcibly removed from their office. And we've all been told by the folks in the mainstream media that you can expect between 5% and 9% average gains just by being a diligent long-term buy and hold investor.
It's a nice sentiment - but it also assumes that stocks always go up over a long period of time, and that's just not a certainty. Putting all of your eggs into one asset class - even one with a good track record - is not an advisable move.
I'm going to recycle a chart I've shown several times now - for the simple reason that it details the exact reasons why you should not throw all of your net worth in one asset class. This chart is courtesy of Barry Bannister, Strategist for Stifel Nicolaus & Co.
Right now, we're clearly in the midst of a long-term secular bear market in stocks. That doesn't necessarily mean it's time to abandon stocks altogether, but it does mean that you should look for opportunities that are likely to succeed in such an investing climate. Commodity investments tend to do well during a bear market in stocks.
Resource investors have done well since 2000, but if this is an average bull run, we have at least eight years left.
Again, if you've been able to take advantage of this bear rally in stocks for a 20% gain, congratulations - but even during this rally, you could have done much, much better just buying gold or gold securities.
Below, I've attached a one year chart of the S&P 500 SPDR (in red) vs. gold's spot price (in blue) and the Gold Bugs index (in green) (AMEX: HUI).
Gold outperformed the broad stock market two-fold over the past year, and gold stocks outperformed three-fold.
But the past three months are even more telling. While the market traded mostly sideways, both gold and gold stocks continued their gains:
If you're not invested in gold stocks these days, you're missing out not just on the biggest gains - you're missing out on some of the only gains in the stock market.
Okay, so I'm not telling the whole story here - let's drill down a little further (pardon the pun).There's one small sector of the stock market that's beating out gold stocks. It's a sector I've been talking about for months now, and I hope that some of you have been able to take advantage of the opportunity.
I'm talking about junior and mid-tier gold stocks. These are the riskier companies that do a lot of the exploration and initial drilling tests for gold reserves. Most of the time these companies go belly up without ever finding gold let alone mining a single ounce.
Sometimes these companies find gold, and then simply hope to get bought out by a larger gold company.
But every now and then, a small mining company literally strikes gold and has the cash and the ability to actually mine the stuff and bring it to market.
These companies typically return your investment 10-100 times over - sometimes more.
The other good news is that junior gold miners also tend to lag increases made in the price of gold. Here's a chart plotting 8 month gold price vs. a junior gold miner ETF:
What this chart shows is that junior gold companies are still playing catch-up with gold. I'm currently working on a full report about commodity ETFs, and I will be releasing this ETF's name, but the report is not quite ready.
In the mean time, Ian Wyatt has already put together a full report on his favorite junior gold miner. I like this company because it has one of the lowest costs to get gold out of the ground of anyone in the business, big or small. I've said it before, but buying this company at today's stock price under $4 is like buying the company's gold in the ground for $120 an ounce.
But right now there's an additional upside for this company. They're on the verge of getting listed on a new exchange, which will bring a lot more attention from mutual funds, hedge funds and other institutional investors. Today is the day that we find out. If you buy ahead of the announcement, I expect this company to get a one day gain of at least 10%.
I've been working with Ian Wyatt all week on getting a full write-up on this opportunity completed. You can read the full story by clicking here now.
Kevin McElroy
Editor
Resource Prospector
