Time To Get Back Into Gold Stocks!

Back in December, the talk of the market was all about gold.  The U.S. Dollar was on the verge of collapse and gold would replace it as the world currency.  I am sure you heard the talk as well.  One evening, my wife came home and asked me if she was invested in gold.  You see, I also manage my wife’s IRA in addition to other professional accounts.  My wife explained that she heard on talk radio that the dollar was doomed and everyone should be invested in gold.  My ears perked up as this was the best contrarian signal I could get.  This was a call that gold was being hyped too much so that “none†investors were being targeted with this message.

Looking at the Rydex Precious Metal Fund (RYMDX), it peaked at $73 in early December and has fallen to near $55 by February (see chart below).  This is about a 33% decline in just two months.  Gold stocks have experienced a significant sell off.   This market is acting very different that what one would expect.  Generally, when interest rates increase, gold will fall.  But this did not happened when the Fed Rate was increased last week.   This is a good sign for gold.  The real rationale is that the eurodollar is so hated that investors have two safe choices: U.S. Dollar and gold.  The US Dollar will continue to be strong as long as Europe is in a debt crisis.  And gold will get a nice bounce from money leaving the euro.

In addition, I have not been seeing the awful television commercial about buying and selling gold.  This is an indication that it may be time to get back into gold.  Since the gold stocks were taken down, I want to use them for a rebound.   The real value is that gold stocks are cheap compared to the price of gold.  This eventually must be corrected by gold stocks increasing in value.

I am more inclined to buy the GDX rather than GLD at this time because I think this is were the bigger increase will be (on the stock side).  If you agree, buy into the GDX and use a trailing stop for protection.