So, umm, buy gold miner stocks...?
LATE last year, gold was stuck below $1300 an ounce, writes E.B.Tucker, editor of Strategic Trader, in Bill Bonner's Diary of a Rogue Economist.
There was a lot of fear in the market because we were only a couple of months removed from gold's lowest price since 2016.
But I wasn't afraid...
In fact, I called for $1500 per ounce of gold in 2019. In August, it hit my target.
Now, the price has retreated a bit since, but I believe $1500 is only the beginning for gold.
I expect gold to take out its previous high of $1900. That's about a 30% gain from here. And I expect that to happen in 2020.
In fact, as I told Kitco News recently, from there I see it hitting $2200 – about a 50% rise from its current price of around $1470 per ounce.
Today, I'll share why...and how you can start taking advantage...
All of the serious money I've made investing came through positioning for a big move and sitting tight. Trading is tough. In and out all the time can work over a short period. But the big gains come from sitting tight and letting the bull market run.
After hitting an all-time high in 2011, the price of gold fell 45% to a low of $1052 in late 2015.
While the Obama administration and the Federal Reserve experimented with radical money policies, gold stayed stuck. It didn't do much after hitting its 2015 low.
What's bad for gold is unbearable for gold miners. They commit to projects assuming they'll sell produced gold for $1500 an ounce. Then it falls to less than $1100. That means the project is bankrupt before it pours the first gold ounce.
That period is over.
I can give you a list of anecdotal evidence as proof. Several large mining firms combined this year in order to survive. These were not bidding war takeovers. CEOs got over their egos and merged to avoid losing their companies entirely.
Political dysfunction and ballooning deficits also set the stage for gold today. The three largest central banks in the developed world recently declared they'll do anything to stimulate their economies. That's central bank lingo for "create more money".
But we need more than strong anecdotes to risk money on the gold sector.
From our view, that's why the chart of the gold price is so important. It's how I determined $1500 was an important target for gold this year. If it hit that target, which it did, I felt it was a green light to invest more aggressively for higher prices.
The gold chart below goes back to 2014. Notice that after gold hit its low in late 2015 (circled in red), each rally that followed registered a higher low. The pullbacks of 2016 and 2018 (also circled in red) each hit low points higher than the last. To us, this meant it was a matter of time before gold exploded higher.
Breaking $1500 was the first test. The next move for gold will catch mainstream asset managers off guard.
As I said above, I expect it to eventually take out its 2011 high. That's why the current pullback in gold is the perfect time to position yourself for what may come next.
The word "leverage" usually means borrowing. That's not the case at all in the gold market.
If you aren't familiar with the concept of leverage in gold stocks, here's a quick example of how powerful it can be...
Say the price of gold rises from $1300 to $1400 an ounce. That's roughly an 8% gain. If you own physical gold, you're up 8%.
Now, say a mining company owns a million ounces of gold in the ground, and gold is trading at $1300. The value of the gold in the ground isn't simply $1.3 billion (1 million ounces x $1300 per ounce). Instead, the gold in the ground is worth much less than that, because it will cost a lot of money to extract.
Say it costs the company $1250 per ounce, all-in, to mine the gold. At a gold price of $1300, the company has a potential profit of $50 on each ounce of gold.
However, if the price of gold rises only 8% to $1400, the company's profits per ounce increase by 200% ($1400 – $1250 = $150 profit per ounce).
This is why a small increase in the price of gold can cause a gold stock to soar many times that amount – increasing 40%, 50%, or more.
It's happened before...
Gold producers boomed during three separate cycles when gold surged: 1979-1980, the mid-1990s, and 2001-2006.
First up, the king of all gold bull markets: 1979-1980...
Gold more than tripled during this period. But gold stocks more than quadrupled.
This wasn't the only time gold stocks ran further than gold itself...
There was another boom in the 1990s. The average gold producer went up more than 200%. Cambior rose 124%. Kinross Gold returned more than 190%. And Manhattan Gold & Silver skyrocketed over 760%. All while gold rose only 8%.
Then, another big boom hit from 2001-2006. Gold returned 158%, while the average gold producer gained over 400%. Newmont shot up 270%. Gold Fields soared over 500%. And Goldcorp returned over 800%.
As you can see, an increase in the price of gold (even a small one) can lead to huge returns.
You don't want to be sitting on the sidelines while the mother lode of all gold rallies gains momentum.
Remember, before owning a gold stock, it's wise to have some physical gold. That's because gold is a tangible asset that you can hold in your hand. It's real money, a safe-haven asset, and a way to protect your wealth. It's survived every financial crisis and will continue to do so.
Then, you can speculate on higher gold prices by buying gold miners, which gives you the chance to multiply your money in a gold bull market.
The best way to take advantage is by following our advice in my Strategic Investor newsletter. In our core portfolio, we have a world-class gold miner that shot up 56% during gold's move from May to September of this year. This is no penny stock. This multibillion-Dollar miner turns a profit and pays a dividend.
Just remember, gold stocks are extremely volatile. Like in any industry, the stocks of stronger companies will go up more than those of weaker ones. As always, never bet more money than you can afford to lose.
It takes only a small stake in the right companies to make a fortune as gold prices rise.