Why This Gold Bull Market Isn't Stopping Anytime Soon
Editor's note: All the pieces are in place to push gold higher...
As the stock market comes off one of the worst starts to the year in decades, gold is trading near all-time highs. But while many of the same factors are causing stocks to swing and gold to spike, Gold Stock Analyst John Doody says the bull market in the metal is bigger than any single event...
According to John, the same forces have influenced gold prices for hundreds of years. And while owning physical gold is a good start, he believes there's a better way to profit as the metal's price keeps climbing...
In today's Masters Series – updated from the March 2020 issue of Gold Stock Analyst and the August 21, 2019 edition of our free DailyWealth e-letter – John discusses the three fears that drive bull markets in gold... details the best way to invest in gold today... and discusses how this strategy can lead to outsized returns...
Why This Gold Bull Market Isn't Stopping Anytime Soon
Today, gold is in a full-fledged bull market...
The metal closed at $2,043.30 per ounce on March 8 – roughly 1% below its all-time high set in August 2020. And the thing is, I see no end in sight...
Bull markets end when there's no one left to buy. And between the coronavirus pandemic, record-high inflation, and the war in Ukraine, investors have plenty of reasons to keep buying gold.
Importantly, the forces at work here are bigger than any individual crisis. They've influenced gold prices for hundreds of years.
So what's driving this gold bull market? Let's find out. We'll start at the top...
Gold-price increases are typically due to three interconnected fears – collectively known as the "Fear Trade"...
1. Fear of War
Whenever war breaks out, the loser's currency becomes worthless – German marks and Japanese yen at the end of World War II, for example. (Less recognized is that the winner's currency also suffers from the inflation brought on by the deficit spending required to fight the war).
You can see this in Russia's currency, the ruble. Before Russia invaded Ukraine, it took about 75 rubles to buy $1 worth of "stuff." Now, it takes roughly 110 rubles.
2. Fear of Recession
Economic recessions bring low interest rates. This means there's less competition from income-yielding assets that "barren" gold has to overcome for price gains.
3. Fear of the Unknown
The value of fiat money – the printed paper that governments declare to be legal tender – is based on confidence in the issuing nation's economy. The unknowns can influence confidence.
These can be internal unknowns: How much inflationary paper will be printed to fund the government? Or they can be external: How will the spread of coronavirus hurt a nation's economy?
Fear of War, Fear of Recession, and Fear of the Unknown are all driving gold higher today.
And while the Federal Reserve intends to raise interest rates this year, rates will stay lower than is necessary to stop inflation. That's because the Fed doesn't want to slow the economy... especially ahead of the midterm elections in November.
And that means this gold bull market can last longer – and rise higher – than anyone expects.
From the Egyptian pharaohs buried with gold jewelry and coins... to the world's central banks stockpiling ingots to back their paper money... to today's most successful hedge-fund managers, who all say they own gold... the metal has been a spending, saving, and investing medium throughout time.
It's a way of spending because it's accepted worldwide and can be converted into local currency for purchases. And it's used for saving and investing because it holds its purchasing power against inflation.
Many prominent investors have praised gold for these two benefits. These investors include Ray Dalio of $223 billion management firm Bridgewater Associates, who has said that gold is one of the assets to own in the coming "paradigm shift." Bond King Jeffrey Gundlach, who manages more than $140 billion, says, "I am certainly long gold."
When you consider what happened after President Nixon set gold's price free in 1971, it's easy to see why. At the time, one ounce of gold cost just $35. Today, more than 50 years later, the same gold ounce is worth more than $1,900.
Demand for gold is timeless. But instead of simply buying gold bullion today, you can make far bigger profits another way... by investing in high-quality gold stocks.
And at Gold Stock Analyst, we have the track record to prove it...
Our independently audited 21-year track record shows a cumulative gain of 1,033% in our Top 10 gold-stock recommendations through the end of last year... crushing the return of the S&P 500 Index and nearly double that of gold itself. And it's far better than the benchmark VanEck Vectors Gold Miners Fund (GDX), which has a cumulative return of nearly negative 8% since it was established in 2006.
That's why we love gold stocks. A selection of the best gold stocks can deliver market-beating returns over the long term... even through bull and bear markets. Take a look at our outperformance over the past 21 years and see for yourself...
Since Federal Reserve Chairman Jerome Powell said the central bank would do "whatever it takes" on March 23, 2020, our Gold Stock Analyst Top 10 portfolio is up roughly 80%. In the same period, gold is up about 20%. That shows the Top 10 portfolio's effectiveness over just owning gold bullion.
In a gold bull market like the one we're in today, the returns can be absolutely spectacular...
During the last gold bull market – a period of a little more than two years following the crash of 2008 – the Gold Stock Analyst Top 10 was up 1,070%. That's four times more than any other gold investment... and 22 times more than the S&P 500. Take a look...
So what's the big secret? These returns are possible because the best gold stocks have leverage to gold prices. This happens in two ways...
1. Operating leverage
Suppose a miner's output is 100,000 gold ounces per year, and this amount costs $1,200 in labor, power, and materials to produce. If the gold price is $1,400 per ounce, the company's operating profit is $1,400 minus $1,200 times 100,000 ounces... or $20 million.
If gold rises to $1,600, the cost to produce doesn't change... But operating profits double to $400 per ounce... or $40 million total. And if 50 million shares are outstanding, profit per share doubles from $0.40 to $0.80. The stock price will rise to reflect this.
2. Asset leverage
Miners typically have 10 or more times their annual production in reserves. So for our example, the miner would have a minimum of 1 million ounces still in the ground.
At $1,400 per ounce, that gold has a gross value of $1.4 billion. At $1,600 per ounce, its value is $1.6 billion, an increase of $200 million. Again, if a company has 50 million shares outstanding, each would now be worth $4 more based on the value change. This, too, will show up in an increased stock price.
With fear running rampant in the markets today, the price of gold could ultimately soar to $3,000 per ounce or more. And the right gold stocks could outperform the precious metal itself hugely in the months ahead.
That's why you need to seize this moment... and own the best gold stocks in the industry today.
Good investing,
John Doody
Editor's note: Investors who followed John's gold-stock investing strategy since 2001 could have turned every $10,000 into $113,000. Now, he says widespread fear, uncertainty, and big market swings are creating a "perfect storm" for gold today...
John recently joined his Gold Stock Analyst colleague Garrett Goggin to explain more about their market-beating approach... and the specific set of gold investments that could soar from here. Plus, they detailed a top catalyst for gold prices that almost nobody is talking about. Click here to learn more.