Why Gold Stocks Will Be Safe During Next Leg of the Bear

A common question I’ve been hearing over the past couple of months is, “Michael, if you believe the stock market will ultimately retest its March 2009 low, why are you recommending positions in gold stocks. After all, if the stock market falls, won’t gold stocks fall as well?”

Yes, this is true. If the stock market goes down, all stocks will be affected. But my bet is that gold stocks will be the least affected by a downturn and they can actually be a good place to park cash.

I say this for three reasons:

Junior gold mining companies have not performed well since the bear market rally started in March 2009. There are many bargains amongst the junior gold mines right now. As the price of gold moves towards $2,000 an ounce, the juniors will rise in price — they are a great speculative play.

The majority of companies listed on the stock market have their success somehow related to consumer demand. After all, the American economy is 70% consumer-driven. Companies like Apple Inc. (NASDAQ/AAPL) could see their earnings drop quickly if consumers stop spending. Gold companies are not affected by consumer spending patterns.

Only two factors drive the price of a gold stock, and that is how much gold the company has access to and the price of that gold. As the stock market declines, money will move out of stocks and into…what? T-bills paying less than one-percent interest? Real estate you can’t liquidate once you buy it? Investors will run to quality gold stocks.

Homestake Mining and Dome Mines (comparable to Barrick Gold and Newmont Mines of today) were the two biggest gold mining producers in the early 1930s, when the Great Depression hit. These stocks did exceptionally well during the 1930s.

A stock price chart of the Dow Jones Industrial Average from the early 1920s to the late 1930s looks terrible…millions of investors lost billions of dollars. But look at a chart during the same period of U.S. gold mining companies and you will see a strong trend upwards.

So, bottom line: all stocks go down during a bear market. But gold stocks, at least during the 1930s, outperformed the popular stock market average exponentially. In fact, U.S. gold stocks were one of the best places to park cash in the 1930s, as these stocks more than tripled in price during the decade, while the rest of the stock market collapsed.

Michael’s Personal Notes:

I really can’t write enough about the terrific job Steve Jobs has done over at Apple Inc. We are talking about a fellow who started the company, was pushed out by his own board of directors, had health issues, got a liver transplant, and overcame so many obstacles. It’s a perfect example, I remind my children regularly, of what persistence and determination can lead to.

Yesterday, Apple reported a huge 76% profit in third-quarter profit. Net income in Apple’s last quarter hit $3.25 billion. Call it demand for the new “iPad,” demand for the latest version of the “iPhone” or simply customer spending on the upswing, Apple continues on a tear.

Jobs has not created a business; he has created a culture. And this is why Apple exceeds. It doesn’t matter if you already have an “iPhone.” If an updated version comes along, you want it, because you love the brand so much. A culture, a community, is much stronger than a business.

Is it any wonder why Apple stock sells at $250.00?

Where the Market Stands:

The Dow Jones Industrial Average opens this morning down 1.9% for 2010 and only 200 points away from turning positive again for the year.

I read so many negative stories about the trading volume being light on the market, the technical picture for stocks being very poor, the economy still in shambles…I often write about these topics myself. Yes, the long-term outlook for America is negative.

But, right now, the stock market — or should I say the bear market — only looks six to 12 months out. With all the negativity surrounding the market and with corporate earnings continuing to rise, I still believe that the bear market rally will continue riding the wall of

worry before it moves lower.

What He Said:

“I see a deal when it’s a deal. And right now there’s a good ‘for sale’ sign flashing on gold bullion and gold producer shares. In fact, after peaking at the $690.00 an ounce level earlier this year, gold could be a bargain at its current price of around $650.00 per ounce. As a

reader, you are undoubtedly aware of my negative stance on the general stock market and the U.S. economy. As the economic problems continue to brew in the U.S., as these problems develop into others, and as they are finally exposed, what other investment but gold will worldwide investors turn to?” Michael Lombardi in PROFIT CONFIDENTIAL, March 14, 2007. Gold bullion was trading at under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended in Michael’s advisories gained in excess of 100%.