Editor’s Note: As regular readers know, Bill thinks gold is likely headed higher. But, our editor doesn’t give out investment advice… he just connects the dots.
That’s why, for today’s guest essay, we’re featuring E.B. Tucker. As a board member of a gold royalty company, he knows a thing or two about owning and investing in gold. Below, E.B. explains why money is about to flow back into this sector… and shows there’s a better way to play the trend than just owning physical gold…
Regular Diary readers will remember I wrote to you on Wednesday. I told you why I thought gold was headed to $1,500 this year. It’s currently trading at $1,330.
But that same day, I also told you that physical gold isn’t an investment. Like Bill, I believe gold is money.
It’s the safest type of money in the world. And it deserves a place in your portfolio. But don’t look at it as a speculation to get rich.
But there is another way to speculate on rising gold prices.
Here’s what I mean…
As I said, I believe we’re headed into a bull market for gold. What is going to push prices higher?
Imagine you’re a professional fund manager. Because those are the guys that move the needle on the gold price.
Right now, fund managers are looking at the U.S., which has gone on this 10-year run of levitating stock prices… where Amazon and other Big Techs have soared… and they’re saying to themselves, “This is getting a little stretched. I should start taking some risk off the table to protect my downside.”
Then you look at gold. You see that we’ve had this exodus from gold over the past seven years. And you say to yourself, “Gold has been going down for years. It’s getting to the point where there aren’t many people left to sell. Just like there’s not many people left to buy Amazon stock.”
In other words, money has flowed out of gold and into stocks for years. But I’m betting that’s about to reverse.
That’s when you get a serious bull market in gold like we saw in 1979-1980. Gold more than tripled, racking up a 214% gain.
But like I said, if you’re looking to speculate on the gold bull. Don’t buy physical gold. There’s a better way…
A Leveraged Speculation
Gold may have tripled in the bull market I mentioned above, but gold stocks more than quadrupled. The average return for the leading gold stocks was 322%.
And that wasn’t the only time gold stocks soared. From 1981-1983, gold producers returned over 70% on average. This stemmed from a mere 11% rise in gold. And it happened in less than two years.
There was another boom in the 1990s. The average gold producer went up more than 200%, while gold only rose 8%.
Then another big boom hit from 2001-2006. Gold returned 158%, while the average gold producer gained over 400%.
You may be wondering, why did gold stocks outperform gold?
Mining stocks are speculations. They’re moonshots. You see these explosive moves higher in gold mining stocks when the gold price is climbing.
That’s because when the price of gold goes up by, say, $100, the profitability of the mining company goes up exponentially.
Think about it. All the mining company’s labor contracts… its processing costs… its smelting costs… its transportation costs – these are all locked in in the short run.
So the extra $100 flows straight to the company’s gross profit. It’s doing the same work – at the same cost – to extract the ore. But it’s selling it for $100 more.
Gold stocks are leveraged speculations on the underlying gold price. That’s why a small increase in the price of gold can cause a gold stock to soar many times that amount.
And when I say “leveraged,” you might think I mean “borrowing.” But that’s not the case in the gold market.
Let me give you an example. Let’s say the price of gold rises from $1,300 to $1,400. That’s roughly an 8% gain if you own physical gold.
Now, let’s say you own shares in a mining company that owns 1 million ounces of gold in the ground. And say it costs the company $1,250 per ounce to mine that gold. At a gold price of $1,300, that company is turning a profit of $50 on each ounce of gold.
If the price of gold now rises by 8% to $1,400, the company’s profits per ounce shoot up by 200% ($1,400 – $1,250 = $150 profit per ounce). This small move in gold could cause that company’s stock price to jump 40%, 50%, or more.
It’s why now is a great time to invest in gold stocks. As the price of physical gold moves higher, gold mining stocks will do even better.
An Easy Alternative
Here’s the bottom line. Like Bill, I see a bull market for gold coming.
You’ll of course want to own physical gold. But remember, gold is money, not an investment.
But if you do want to speculate on rising gold prices, gold stocks are your best bet.
The best way to get broad exposure to gold stocks – and the leverage they give you to rising gold prices – is through the VanEck Vectors Gold Miners ETF (GDX).
It holds shares of 46 of the most well-established and widely traded stocks involved in the gold mining business. So it’s the easiest alternative to picking individual mining companies.
Editor, Strategic Investor
P.S. With gold poised to shoot higher this year, I’m positioning my readers to potentially make a small fortune with the “best of breed” gold mining stocks. But there’s another money-making idea I want to put on your radar.
For years, I’ve been using a very unusual investment strategy – I’d say not even one in 100 investors has ever heard of it – to make gains as stocks get roiled. It’s not cryptocurrencies… or stocks… or options. It’s something I call “premium shares.”
Last year, for example, the U.S. stock market had its worst year in a decade. The S&P 500 ended the year down 6%. And it fell 9% in December – making it the worst December for stocks since the Great Depression.
But if you owned “premium shares” of a little-known power company called Vistra Energy, you could have made 620% in just six months… without putting a single cent in the stock market. In fact, if you’d owned regular shares of Vistra, you would’ve made just 20% over the same time.
How is that possible? And how can you make those types of returns with “premium shares”? I’ll show you how right here.