I think the spot price of gold is coming to a turning point, ready to take on a major new trend. Gold has been consolidating quite naturally after it hit $1,900 an ounce and its correction, in my view, was quite modest. Now there’s renewed momentum, with the spot price turning up and gold stocks are moving again.
The stock market is actually holding up pretty well as far as I’m concerned. The most recent batch of U.S. economic data wasn’t all that great, yet the stock market shrugged off the news. The situation in Greece is calling the shots for the stock market, as investors are unable to look beyond that tiny country’s problems. The eurozone has some major structural problems, but none of this is new. Flat expectations for economic growth in Europe are a given and that’s why second-quarter earnings season can’t come soon enough. U.S. stock market investors need some domestic corporate news off of which to trade.
There’s been a lot of growth in gold miners over the last couple of years. Many of these companies have actually been stockpiling some of their production, waiting to sell those ounces when spot prices are higher. This strategy has been more popular with silver producers—silver is clearly underpriced in my view.
Following a numbers of gold mining companies on the stock market, I see lots of businesses that are very reasonably valued given their earnings growth. It’s very true that gold stocks have a difficult time going higher if the spot price of gold isn’t going up. As an investor in gold stocks, you always have this added risk—the risk that the underlying commodity won’t trend in the way that you want it to. But, with this reality in resource stocks, you do have more opportunities as a speculator to buy value. (See Precious Metal Stocks in Correction—It’s Time to Look Closer.) We’ve seen it happen several times on the stock market over the last few years: gold stocks got beaten down, only to turn significantly higher with the spot price.
Everything in capital markets seems to be coming to a head this year and you can bet that there’s going to be a lot of turmoil going into 2013. I do think that any reasonably balanced stock market portfolio should have some exposure to gold. Investment risk in the world is just too high not to have some. If things start to come apart in the eurozone, global investors will run even faster to the U.S. dollar…and gold, to a lesser extent. No doubt, it’s a tough environment in which to be making new bets.