Sure Looks Like This is Just the Beginning for Gold

by JDH on August 8, 2020

Gold traded at $869 at the beginning of January, 1980.  It did not touch that level again until December, 2007.  27 years to make a new high.

On March 3, 2008 gold topped at $1,033, and didn’t see that level again until August of 2009, a year and a half later.  But then, after that break out, gold went on a rocked ride, and topped at around $1,920 in September, 2011.

That was a two year run that close to doubled the price of gold.  Not bad.

But then, as we all know, came the Great Consolidation, and gold bottomed at around $1,050 in November, 2015, losing close to half of it’s value, and it was not until this week, August 2020, in the midst of the Great Pandemic, that gold made a new high of over $2,000, doubling in just under 5 years.

Past history does not guarantee future performance, but it is clear that gold has periods of consolidation, and then periods of growth.  It would appear that we are now in a period of growth.

From the break out in 2009 to the high in 2011, gold was close to a double.  It would not be unreasonable to expect that from the break out in 2020, over the next year or two or three, gold could also double.  It’s happened before.  Given the money printing happening now, it could happen again.

So, how to play it?

You could buy bullion, and over the next two years double your money.  That’s not bad.  Or, go for the most risky alternative, and do it with stocks.

GDX, the Gold Miners ETF, peaked at almost $57 in September, 2011 before bottoming at the start of 2016 at just over $12.  Yesterday it closed at $42.74.  Unlike gold, the gold stock indexes have not yet made a new high.  Could GDX double from here?

Sure.

Could it double from it’s all time high?  Sure.  $100 or more on GDX is entirely possible.

Gold stocks lag the metal.  A lot of gold stock investors got burned during the Great Consolidation, so they are not yet eager to jump back into the fray.  But, as exploration activity picks up, and as the price of gold continues to rise, gold stocks will catch fire.

If your gold mine needs the price of gold at $1,800 to be profitable, your mine is worthless under $1,800.  But, as soon as the price of gold gets over that number, everything is profit.  That’s the beauty of leverage, and that’s why gold miner stocks are taking off.

Of course, as both of the above charts show, gold is volatile, and does not go up in a straight line, so sharp consolidations along the way are inevitable.

That’s why, if you assemble a basket of gold stocks, it’s prudent to take profits along the way, and always have some cash on hand.

Think of the profits you could have made if you had a lot of cash at the bottom on March 23, 2020, and if you had the guts to deploy it?  No-one can catch the top and bottom, but putting in below-market buy orders, and selling as the market increases, seems prudent.

That’s the game plan.  I’ll have more comments on specific stocks next week.

Enjoy the ride.