Central Bank and Inflation—the Top
New Fundamentals for Gold Stocks

The best news for the spot price of gold and individual gold stocks isn’t the European debt crisis; it’s the fact that central banks are buying gold bars again and it’s the reality of inflation.So the stock market is gyrating and this is the new norm. All equities can’t escape the prevailing trading action in the stock market, but the one sector that continues to have above-average potential is precious metals; gold stocks in particular. Not all gold stocks are doing well in this market, but there’s a lot that are, and they are smaller players that have their own growth stories. If I were a stock market speculator focused on only one industry group, it would be on gold investments. The outlook is that good within the industry.

The best news for the spot price of gold and individual gold stocks isn’t the European debt crisis; it’s the fact that central banks are buying gold bars again. For years, the central banks of mature economies have been selling off their gold holdings for the simple reason that the assets didn’t generate any rate of return while sitting in the vaults. Now that there’s so much uncertainty in the marketplace and U.S. dollar leadership has lessened, many countries are quietly creating new stockpiles.

We’ve talked about a number of growing gold producers in this column (see Everything Gold Is Turning Into Some Serious Green). I watch dozens of gold stocks at once, and I’d stick with those trading near their 52-week highs. I’d rather try to buy gold stocks high, with the hope of selling at a higher price later, than try to buy low. If a gold stock isn’t doing well now, then it’s less likely to do so later. This isn’t the case for the rest of the stock market, but the gold sector in particular.

The stock market has already rewarded many gold investments, but the spot price of the commodity has so much upside potential going forward that the business model for established producers is very good. There is a lot of risk in the global economy and core inflation rates in mature economies are going up. If the stock market does nothing over the next six months, it’s my prediction that gold stocks will be some of the best performers, following the spot price as it slowly ticks higher.

For speculators in the sector, you want to choose from gold stocks that offer an attractive package—an established miner with growing production, ongoing exploration, declining cash costs, etc. With so much uncertainty in the world and the stock market, exposure to some gold investments is a must in this market. There isn’t any rush to consider much else.