Gold Stock Apocalypse Is Epic Buying Opportunity
Since their all-time record high in September 2011, gold stocks as measured by the HUI yardstick have lost a gut-wrenching 76.9% in 3.2 years. They had bottomed decisively in mid-2012, but then the US Federal Reserve started levitating general stock markets with its wildly-unprecedented third quantitative-easing campaign. So capital started to migrate out of alternative investments, a realm long dominated by gold.
While gold stocks indeed should've been sold with gold weaker, the magnitude of selling they suffered was far beyond anything justifiable fundamentally. This ultimately culminated in the latest gold-stock capitulation where the HUI plunged to 11.3-year lows! Think about that a second. Gold stocks were just trading at prices not seen since July 2003. Pretty much the entire secular gold-stock bull had been fully erased.
Do gold stocks deserve to trade today as if gold was at just $350? Heck no! Last week when gold stocks' latest capitulation low was carved, the gold price was up near $1150. That was 3.3x higher than the last time the gold stocks traded at recent levels! It makes no fundamental sense whatsoever for gold stocks to trade as if gold was at $350 when it was actually $1150. Their core fundamentals are now vastly better.
Contrarians tough enough to fight the herd and buy low are going to multiply their fortunes, again. After the last time gold stocks traded at remotely-comparable lows in 2008's stock panic, they were destined to more than quadruple over the next several years. No sector moves in one direction forever, or remains disconnected from its underlying fundamentals forever. And this certainly includes the despised gold stocks.
DYI Comments: No doubt the gold miners have been pummeled, thrashed, pounded into a peak to trough 77% decline! For those of you who need to re-balance selling off shares of your high flying generalized stock fund or pulling a few dollars from your short term bond fund to buy shares of your favorite gold mining fund makes all the sense in the world. Markets can stay pounded down far longer than one can believe is possible despite the excellent value for this sector; when the up turn will occur DYI has no idea (nor does anyone else!).
The Dow to Gold Ratio is currently at 15 to 1 making gold (not the miners) a bit pricey in relationship to stocks. This buying opportunity is "not an all in" but up to a maximum of 20% or less of one's portfolio is warranted.
Long term chart Dow to Gold Ratio.
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Here is where DYI stands today with our model portfolio.
AGGRESSIVE PORTFOLIO - ACTIVE ALLOCATION - 11/1/14
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DYI
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