A Value Investor's Gold Stock Shopping List

I hate to toot my own horn, but when you call a gold price
correction on the day it occurs, you have to be your own
cheerleader.

As I write, the price of gold is down 3% – and falling. I still think we’re
in for about a 10% total gold price correction, from peak to trough. And it
could be worse than that – but not much.

Now that the trend is playing out, I think it’s time to ready yourself to
buy some gold stocks on sale.

For the record – I’m still massively long-term bullish on gold. And I’m not
a trader so I’m not shorting gold now, nor was I two days ago.

Why am I bullish on gold stocks? Well, the world’s central bankers are
playing with their cards face up. All of these fiat currencies are in big
trouble, and yet, folks like Ben Bernanke are telling us that they plan to
keep interest rates low for at least the next 18 months. Low interest rates
are almost always inherently inflationary – and bullish for gold.

And right now, the only thing in more of an uptrend than gold prices is the
United States’ national debt:

It’s funny because a chart plotting gold’s price back to 1940 looks eerily
similar. Relatively flat until the early 1970s, followed by a huge
uptrend.

Coincidence?

Okay, onto gold stocks.

I anticipate that gold stocks will get somewhat shellacked during this gold
correction, and that’s already started to play out as you can see from this
chart of the AMEX Gold Bugs Index (AMEX: HUI):

Now before you go googling the gold bugs ticker, it’s not an ETF. It’s just
an index of the 12 largest publicly traded gold companies. You can’t buy
this index – but as you can see it’s already down about 3.5% – and I expect
gold stocks to continue to get whacked to the downside whenever gold prices
correct.

But the real story on gold stocks is that they’ve been on sale for the past
few years.

Take a look at this performance chart which plots the percentage gains of
gold vs. the Market Vectors Gold Miners ETF (NYSE:
GDX):

The price of gold has been outpacing gains in gold stocks since the market
crash of 2008.

Gold stocks took a 75%+ haircut in 2008 even though gold only retraced
about 30% over that same period. And gold stocks really haven’t
recovered.

They should be selling for a premium to the price of gold – as you can see
from the chart above, between 2003 and 2008, they did sell for a premium to
gold’s gains. That’s normal territory for gold stocks for the simple reason
that they can increase their profit margins by leaps and bounds when gold’s
price rises.

And I think we will see a resumption of that trend sooner or later – which
is why you should be buying gold stocks, specifically the
best-of-breed gold stocks, whenever you see gold prices dipping. Gold stocks as an asset
class are already on sale. Any gold price correction puts them at fire-sale
prices.

I like GDX, and its little brother GDXJ as ETFs if you want to go that
route. They’re a simple way to get diversification in the sector, and
you’ll save money on transaction fees by buying these ETFs instead of the
individual companies, and they actually have a pretty low annual expense
ratio of just 0.53% and 0.54% respectively.

Also, if your brokerage doesn’t let you buy shares on Canadian, Australian
or other foreign exchanges, these ETFs have a good mix of companies from
those countries.

Honestly, you could get fancy and buy individual companies, but when the
whole sector is on sale, you shouldn’t overthink the situation.

I’d consider averaging into these two ETFs as long as gold is falling. When
it resumes the uptrend, I think these ETFs will quickly correct to the
upside – so don’t try to time any tops or bottoms. Average in over the next
few days or weeks and you’ll make out like a bandit