Friday, July 2, 2010

Gold And Double Dip Recession

Kevin McElroy, over at Seeking Alpha, has gone out on a limb and said the U.S. economy is going in to a double-dip recession. He bases his forecast on the performance of the S&P 500 over the last two months.

His recommendation on how to cope with it is gold stocks, as proxied by the Market Vectors Gold Miners ETF (GDX.) Although GDX was slaughtered in late 2008, that rout made for a great buying opportunity.
Now, I don’t know for sure if gold stocks will get slaughtered along with the broad market like they were in late 2008/early 2009 - but it’s something to look for.

In the meantime, you should be averaging into these gold stocks - and the GDX ETF is one great way to do so.

That’s because while gold sells near its all time highs, gold stocks are still playing catch-up. That increased profit capacity from higher priced gold hasn’t hit their bottom lines - yet.

Gold mining stocks typically magnify gains made in gold’s price, and right now they’re still cheap on that basis. Even if we don’t get another great buying opportunity, I still expect many gold stocks to double in the next 12-18 months. Buying these companies today gives you exposure to the increased earnings power of companies that can mine gold for much less than the spot price.

Of course, the main reason why gold stocks got slaughtered is gold itself did. So far, there's no sign of any corresponding slaughter even though stocks have been hammered. Gold peaked in February of '08, with a slightly lower top coming in July of that year. There hasn't been the same action so far.

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