Gold Shares in a Crashing U.S. Stock Market

(originally published on 2/7/06)

As some of you probably already know, there are a multitude of reasons why I believe the broader stock markets are about to meet a financial Freddy Krueger.

I won't repeat myself here, other than to say that we are fast approaching the point at which the U.S. government will have to choose between crushing hocked-to-their-eyeballs American consumers by continuing to increase interest rates (a rock) in order to keep the dollar attractive to the foreigners who lend U.S. markets about $2 billion per day... or letting the dollar tank (a hard place), triggering all sorts of fiscal unpleasantness.

Rarely is predicting the future anything more than self-conceit or a ready topic for cocktail chatter; there are simply too many variables to allow for accurately predicting anything more complex than what time your alarm clock will go off in the morning.

Even so, predicting the coming financial crisis is a relatively straightforward affair, made so by the fact that it is now unavoidable. The only question is how bad it will get. And it could get extremely bad... especially when you throw in some of the other wild cards--which these days could be anything from a serious spike in energy prices... an upwards revaluation of the Chinese renminbi... or another major terrorist attack.

Given that less than rosy view, it is no wonder that I am so bullish on gold and silver... and especially the high-quality gold and silver stocks we follow in the International Speculator, which offer the best leverage. In the last, discovery-led gold share bull market in the 1990s, even run-of-the-mill gold stocks went up by 1,000%, 2,000%, 5,000%--all while gold prices stayed flat.

This time around, gold is running up concurrently with a still emerging string of mining discoveries, so the returns on quality gold stocks should be even better. Already, we are regularly pulling down doubles and triples--but the best is still ahead.

Or is it? After all, gold stocks are stocks, and so it's logical that they would get dragged down when the general stock market tumbles. Right? Let's put that notion to the test.

At closer inspection, the idea doesn't hold up. Reviewing a chart showing gold stocks versus the broader market (click here), you'll see that gold stocks largely march to their own drummer, sometimes in the same direction as the broader stock market, but sometimes distinctly contrary to same. Yet it is true that the strongest moves in gold stocks have occurred when the general market, as well as gold, was moving up (1971-73, 1983-1983, 1985-1987, 1993-1996).

One notable factor is how much more volatile the gold stocks are--which is good if you are willing to accept the higher level of risk in exchange for higher potential return. It is also a good reminder that these things are not heirlooms, but more akin to burning matches; when you get a big profit, be sure to sell at least enough to get your original investment off the table.

The other thing to note, which is especially relevant to the topic of this article, is the price action of gold stocks during the dot-com bubble and the following collapse in the period 1995 to 2000.

At the time, of course, no one wanted to hear about something as archaic as precious metals, the ultimate tangible. Instead, intangibles were all the rage, though even that seems too tame a word. Precious metals stocks went down, down, down as the dot-coms went up, up, up. But then, when the cyber-bubble burst, gold stocks started their rise.

While the broader stock market has since recovered, it is a recovery built on a fantasy of easy money and debt. When that fantasy ends, it will be gold and silver stocks that are left standing.

If you haven't yet built your portfolio of precious metals stocks, don't put it off. Something brutal this way comes. It will either run you over or make you rich.


Rather than living in fantasy land, smart investors make sure they won't get swept away along with the debris of the broader stock market.

Every month, in the International Speculator, Doug and the Casey Research team hand-pick undervalued junior exploration stocks that provide the most upside with the least downside risk. On average, we count on a 100% return within 12 months.

Learn how to double your money here.

Posted 06-26-2007 12:31 PM by Doug Casey