 What Will Happen to Gold Shares in
a Crashing U.S. Stock Market?
By Doug Casey
Chairman, Casey Research, LLC.
The
International Speculator
January 24, 2006
As some of you probably already
know, there are a multitude of reasons why I believe the broader
stock markets are about to meet a financial Freddy Krueger.
I won't repeat myself here,
other than to say that we are fast approaching the point at which
the U.S. government will have to choose between crushing hocked-to-their-eyeballs
American consumers by continuing to increase interest rates (a
rock) in order to keep the dollar attractive to the foreigners
who lend U.S. markets about $2 billion per day... or letting
the dollar tank (a hard place), triggering all sorts of fiscal
unpleasantness.
Rarely is predicting the future
anything more than a self-conceit or a ready topic for cocktail
chatter; there are simply too many variables to allow for accurately
predicting anything more complex than what time your alarm clock
will go off in the morning.
Even so, predicting the coming
financial crisis is a relatively straightforward affair, made
so by the fact that it is now unavoidable. The only question
is how bad it will get. And it could get extremely bad... especially
when you throw in some of the other wild cards - which these
days could be anything from a serious spike in energy prices...
an upwards revaluation of the Chinese renminbi... or another
major terrorist attack.
Given that less than rosy view,
it is no wonder that I am so bullish on gold and silver... and
especially the high-quality gold and silver stocks we follow
in the International
Speculator, which offer the best leverage. In the last,
discovery-led, gold-share bull market in the 1990's, even run-of-the-mill
gold stocks went up by 1,000%, 2,000%, 5,000% -- all while gold
prices stayed flat.
This time around, gold is running
up concurrently with a still emerging string of mining discoveries,
so the returns on quality gold stocks should be even better.
Already, we are regularly pulling down doubles and triples --
but the best is still ahead.
Or is it? After all, gold stocks
are stocks, and so it's logical that they would get dragged down
when the general stock market tumbles. Right?
Let's put that notion to the
test.
As you can see from the chart
below, the idea doesn't hold up. Gold stocks largely march to
their own drummer, sometimes in the same direction as the broader
stock market, but sometimes distinctly contrary to same. Yet
it is true that the strongest moves in gold stocks have occurred
when the general market, as well as gold, was moving up (1971-73,
1983-1983, 1985-1987, 1993-1996).
Notable in the chart is how
much more volatile the gold stocks are - which is good if you
are willing to accept the higher level of risk in exchange for
higher potential return. It is also a good reminder that these
things are not heirlooms, but rather more akin to burning matches;
when you get a big profit, be sure to sell at least enough to
get your original investment off the table.
The other thing to note, which
is especially relevant to the topic of this article, is the price
action of gold stocks during the dotcom bubble and the following
collapse, generally reflected in the period 1995 to 2000.
At the time, of course, no
one wanted to hear about something as archaic as precious metals,
the ultimate tangible. Instead, intangibles were all the rage,
though even that seems too tame a word. As the chart shows, precious
metals stocks went down, down, down as the dotcoms went up, up,
up. But then when the cyber-bubble burst, gold stocks started
their rise.
While the broader stock market
has since recovered, it is a recovery built on a fantasy of easy
money and debt. When that fantasy ends, it will be gold and silver
stocks that are left standing.
If you haven't yet built your
portfolio of precious metals stocks, don't put it off. Something
brutal this way comes. It will either run you over or make you
rich.
DOUG CASEY is the author of Crisis Investing
which spent 26 weeks as #1 on the New York Times Best-Seller
list. He is also editor and publisher of the International Speculator,
one of the nation's most established and highly respected publications
on gold, silver and other natural resource investments. Doug
has made himself and his subscribers millions with his in-depth
research, right-on perceptions and contrarian attitude. To learn
more about becoming a subscriber to the International Speculator,
click
here.
-Doug Casey
The International Speculator
321gold Inc
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