The Midas Method: Why Gold Shines Now
Maybe there’s an investment message behind President Trump’s installation of gold curtains in the Oval Office. In the turbulent Trump Era, we’ve witnessed the emergence of “gold mania” among increasingly anxious investors.
In recent days, the coronavirus outbreak has pummeled economic activity, global growth and stock markets. As of this writing on Tuesday, at least 89,000 global cases have been reported and the overall death toll stands at over 3,000.
The stock market dropped more than 10% last week, a correction triggered by the epidemic. On Friday, the CBOE Volatility Index (aka “fear gauge”) rose to heights not seen since the Great Recession.
But on Monday, expectations that the Federal Reserve would boost rates in March sent stocks soaring. The Dow Jones Industrial Average yesterday rose 1,294 points, its biggest daily jump since 2009, as bargain hunters came to the fore.
In pre-market futures trading this morning, stocks were seesawing between red and green as nervous investors awaited a statement today from the Group of Seven industrial powers concerning the coronavirus crisis.
Welcome to the roller-coaster. It’s under nerve-wracking conditions like these that the Midas metal shows its mettle.
For several months, I’ve been advising readers to maintain an allocation in their portfolios of 5%-10% in gold, in the form of either gold mining stocks, exchange-traded funds (ETFs), or the physical bullion itself. If you have been following this advice, you’re sitting on some nice gains.
Conditions are ripe for gold price appreciation. But don’t just take my word for it. Nouriel Roubini, the famous economist who earned the nickname “Dr. Doom” for his accurate predictions of the 2008 financial crisis, believes that the spread of coronavirus will torpedo the global economy and stock market.
Roubini last week told the German magazine Der Spiegel that the coronavirus will “shock the world” and cause the stock market to drop by as much as 40% this year. If it comes to pass, Roubin’s scenario would propel gold prices skyward.
China, where the coronavirus epidemic originated, already is experiencing a pronounced economic slowdown. China’s manufacturing purchasing managers index plunged to 35.7 in February, the lowest level since the survey began in 2004, the Chinese government reported on Saturday. Analysts cited the coronavirus as the culprit.
Gold has been on a tear and it probably has further to run. Gold currently hovers at a price of $1,603 per ounce. Take a look at the following chart, which tracks gold’s glittering path over the past three years:
As you can see, gold recently took a breather from its long upward climb. Now’s the time to hedge your portfolio with the yellow metal.
Nuggets of wisdom…
Many “gold bugs” prefer owning physical bullion. Why buy the yellow metal itself?
Gold maintains its intrinsic value despite a government’s ability to back its currency. If your country’s currency implodes, you can still spend physical gold. Gold is universally accepted around the world, without the need to convert it into the local currency. Gold can be bartered anyplace, anytime. And if banks freeze individual accounts during an economic crisis, a physical gold investment can always be accessed.
If you seek ultra-safety, there’s a lot to be said for owning bullion. However, I prefer gold mining stocks to bullion or even gold funds. I’ll explain my reasons.
An investor who buys gold outright owns an asset that will fluctuate in value. If you buy an ounce of gold at $1,000 and the price goes up to $1,100, you’ve just captured a +10% return. Not too bad. And chances are good the price of your asset won’t fall all the way to zero, so the limited upside you’re exposed to is balanced out by the limited downside risk. Non-leveraged positions are inherently conservative.
But if you own gold mining stocks and the price of gold goes up, the notion of “operating leverage” comes into effect. A bump in gold prices will likely exert an exponentially huge boost on a gold producer’s top line revenue. And because the producer doesn’t have to put a whole lot of additional labor or capital into digging out increasingly valuable gold, its earnings per share should go up and take the stock’s price with it.
A +10% increase in the price of gold should eventually lead to a more extreme price movement in the price of gold mining stocks because the gold miners have debt on their balance sheets.
Of course, the only rational reason to invest in gold stocks is if you have determined that the actual price of gold will rise. I think it will.
Gold deserves a place in your portfolio. Under current market conditions, about 25% of your allocations should be in hedges and 5%-10% of your hedges sleeve should be in precious metals such as gold.
To be sure, gold mining stocks entail more risk than bullion or ETFs, because these individual companies must contend with the tribulations of running operations in sometimes unstable political environments. However, when there are profits, they tend to be very big.
Investors should consider junior gold miners. Those with a higher tolerance for risk are reaping tremendous profits from these small fry. Small mining companies not only make prime takeover targets, but as a whole they’ve been strongly performing asset classes this year.
Looking for the best gold mining stock? My colleague Dr. Stephen Leeb has pinpointed an under-the-radar gold miner that shines above the rest. This small-cap “rocket stock” is poised to blast off, but most of Wall Street hasn’t even noticed the company.
Dr. Leeb is chief investment strategist of the premium trading service, The Complete Investor. The time to invest in his gold mining play is now, before the rest of the investment herd catches on. Click here for details.
John Persinos is the editorial director of Investing Daily. Questions about gold investing? Send him an email: email@example.com