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History Says Gold Stocks Could Double in Eight Months

By Dr. Steve Sjuggerud
Wednesday, June 15, 2011

My favorite gold stock "value" indicator is flashing BUY right now.
The last two times this happened, gold stocks doubled in eight months or less...
This indicator is simple at its core. But it takes some work to put it together. Fortunately, my friend John Doody does the work for us...
John's excellent gold stock value indicator is a feature of his newsletter, The Gold Stock Analyst.
John's indicator essentially looks at two things...
  • How much gold do you have in the ground?
  • How much gold are you producing?
John has determined the "fair value" of these things for his universe of gold stocks, relative to the price of gold. When investors get too excited about gold stocks, they trade at a premium to John's fair value. When investors are down on gold stocks, they trade at a discount to John's fair value.
And the indicator works...
Gold stocks last traded at a big premium to John's fair value in October 2007. The indicator was right: Gold stocks fell 50% over the next year.
By October 2008, gold stocks were cheap by John's indicator... And they more than doubled in seven months. Right again. (The previous time gold stocks were particularly cheap by John's indicator was back in March 2003... Gold stocks doubled in eight months.)
Last week, I saw John Doody at a conference in Pennsylvania. He told me gold stocks are darn cheap once again relative to their fair value.
It makes sense... Since the beginning of May, gold stocks have tumbled, down by double-digits in percentage terms. Meanwhile, the price of gold is up (just barely).
So gold stocks are now cheap once again.
It's the third-cheapest they've been since 2003. The other two times gold stocks got cheap like this, they doubled in eight months or less.
Of course, I can't guarantee a double in eight months this time around... but history is on your side here, based on the best gold stock valuation indicator I know.
The simplest way to buy gold stocks is through GDX, a basket of big gold producers.
Gold stocks are a great value. Trade accordingly.
Good investing,

Further Reading:

In April, Steve checked in with John Doody to see if the former economics professor thought gold was in a bubble. "What powers Gold is not a fad investment such as the dotcoms," Doody told him. Get the full story here: Gold Guru: What the Talking Heads Don't Understand.
Over the past month, Steve has written about two of his favorite gold investments today. Learn more here: This Soars in a Gold Bull Market, But You Haven't Missed It Yet and here: My Favorite Way to Buy Gold Today.

Market Notes


With today's chart, we present another "downside breakout," and another reason to stay cautious toward "cyclical" assets.
Last week, we noted the ugly six-month low in shares of Cummins. As the world's largest independent manufacturer of high-horsepower diesel engines (the kind that go in bulldozers and heavy trucks), Cummins' share price rises and falls with the pace of global economic activity. This makes Cummins a "cyclical" stock.
Another "cyclical" idea is the big S&P metals and mining investment fund (XME). This fund consists of copper producers, steel makers, and various other companies responsible for mining and smelting vital building materials. If folks aren't building and manufacturing at full speed, this fund suffers.
Like most assets, the XME has enjoyed the huge E-Z-Credit "goosing" provided by governments in the U.S. and China. But now that the latest data shows a slowing global economy, the XME has "topped out" and just hit its lowest low in six months. Another red flag flies...


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