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We Have Seen the Bottom in Gold StocksBy
Thursday, October 24, 2013
"We Have Seen the Bottom!" gold expert John Doody "shouted" in his Gold Stock Analyst newsletter on July 1.
Gold stocks rose over the next few months, before falling back near their June lows. But all of a sudden, gold stocks are on the move again. John's July call looks like it might be right after all.
John has been writing about gold stocks for more than three decades. He's one of the smartest analysts in the industry. You hate to bet against him... Over the last 12 years, his gold-stock recommendations have resulted in 1,200%-plus gains (based on his audited track record).
One of my favorite features of John's letter is his way of tracking whether gold stocks are cheap or expensive relative to the price of gold. It has proven to be incredibly accurate.
When gold stocks are cheap according to his measure, you want to buy. And right now, gold stocks are CHEAP!
Lately, gold stocks have been undervalued by 40%-plus. Based on history, we've only seen prices this cheap one other time – at the market bottom in 2008.
Buying then would have led to 126% gains in six months.
In fact, any time John's measure got below 25% undervalued would've been a great time to buy. Take a look...
 As the chart shows, big gains followed the last few times gold stocks got anywhere near this cheap. And remember, the only time they were really close to today's value – in 2008 – shares of the Market Vector Gold Miners Fund (GDX) soared 126% in six months.
I believe we're on the verge of a similar move right now. GDX is up as much as 12% over the last two weeks. Like John, I believe we've likely seen the bottom for gold stocks... And this could be the beginning of a major leg higher.
We have an opportunity for a great trade here... with limited downside risk (14%) and triple-digit upside potential.
To make this trade, you could buy the Market Vectors Gold Miners Fund and set a hard stop at the fund's recent low of $22.22.
If shares fall below that level, sell the next day. You'll have given up 14% on the downside.
If I'm right, and history repeats, you have triple-digit upside potential... possibly in as little as six months.
Good investing,
Steve
Further Reading:
With gold being more hated now than it has been in years, Steve says we have an excellent setup for a low-risk, high-potential trade... "This is about as good as it gets for placing a trade in gold," he says. To learn how to take advantage of this opportunity, click here.
DailyWealth classic: "Gold is the asset that can't be inflated, yields nothing, and is no one's liability," says Dan Ferris. "It's real wealth... pure wealth... the most enduring form of wealth in history." He says you should always own physical gold. Learn why here: Why Value Investors Should Buy Gold.
Market NotesAS EXPECTED, GOLD IS RALLYING AGAINST CRUDE OIL Just as we expected, one of the most important ratios you're not following is rallying in favor of gold...
Back in July, we explained how there is an interesting world of trading ideas that can be termed "ratio trades." These aren't the conventional "buy a stock and hope it goes up" trades. They involve trading one asset against another asset. For example, one of the most important ratios in this group is the "gold-to-oil" ratio.
Since they are both commodities with intrinsic value, gold and oil can be affected by the same buying and selling pressure in the market. But their values can get "out of whack." When this happens, traders can step in to sell gold and buy oil... or buy gold and sell oil. The profit on these trades depends on how the two assets move against each other... rather than how they move on their own. We used this analysis to time – almost to the day – the epic 2008 bottom in crude oil.
From late 2012 to mid-2013, the gold-to-oil ratio fell from 20 to 12. This means gold has collapsed in value relative to oil. In July, we noted that gold was badly out of favor... and oil was very "in favor." We expected gold to rally against oil. As you can see from the chart below, the gold-to-oil ratio has bottomed out... and is moving in gold's favor. Look for this rally to continue.
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