by Doug Casey, Casey Research:
Justin’s note: All month, we’ve been sharing the top insights from Strategic Investor editor E.B. Tucker. If you haven’t yet, make sure to check out his recent essays on legal sports betting and America’s new energy shift… and how they can help you make a fortune in 2019.
But those aren’t the only trends on his radar…
You see, E.B. is also a true gold expert. Before working in the newsletter business, he co-managed a precious metals equity investment fund. Today, he serves on the board of a successful gold company. In short, he has deep connections in the gold business. And he’s helped his readers book big gains from some of the industry’s most explosive stocks.
In fact, one of his picks in Strategic Investor just shot up 28% in one day.
And recently, E.B. showed us why he thinks gold prices are going to rip 22% higher this year. In today’s essay, he explains how you can use a rising gold price to book big gains…
By E.B. Tucker, editor, Strategic Investor
Regular readers know that I think gold prices are headed higher in 2019.
Today, I want to show you an easy way to take advantage of this trend.
I’m talking about buying gold stocks.
Gold stocks aren’t much different than any other type of stock. They just happen to be shares of companies that produce gold.
These companies mine the ore that contains the metal and sell it to refineries. The process is similar to oil or any other natural resource in the ground.
The reason why gold stocks perform better than gold is simple: They offer leverage to the gold price.
That’s why the returns can be spectacular.
Let me explain…
The Power of Leverage
The word “leverage” usually means borrowing. That’s not the case at all in the gold market.
If you aren’t familiar with the concept of leverage in gold stocks, here’s a quick example of how powerful it can be…
Say the price of gold rises from $1,300 to $1,400. That’s roughly an 8% gain. If you own physical gold, you’re up 8%.
Now, say a mining company owns a million ounces of gold in the ground, and gold is trading at $1,300. The value of the gold in the ground isn’t simply $1.3 billion (1 million ounces x $1,300/oz.). Instead, the gold in the ground is worth much less than that, because it will cost a lot of money to extract.
Say it costs the company $1,250 per ounce, all-in, to mine the gold. At a gold price of $1,300, the company has a potential profit of $50 on each ounce of gold.
However, if the price of gold rises only 8% to $1,400, the company’s profits per ounce increase by 200% ($1,400 – $1,250 = $150 profit per ounce). This small move in gold can cause the stock price to increase 40%, 50%, or more. This is why a small increase in the price of gold can cause a gold stock to soar many times that amount.
It’s happened before…
A History of Gold Market Booms
Below are the historical returns for gold producers during four separate cycles when gold boomed: 1979-1980, 1981-1983, mid-1990s, and 2001-2006.
These are not hypothetical returns. They are real.
First up, the king of all gold bull markets: 1979-1980…
Gold more than tripled during this period. But gold stocks more than quadrupled.
|Returns of Producers From 1979-1980|
|Sept. 1980 Peak||Return|
|Campbell Red Lake Mines||$28.25||$94.75||235.4%|
|Giant Yellowknife Mines||$11.13||$39.00||250.4%|
This wasn’t the only time gold stocks soared…
From 1981-1983, gold producers returned over 70% on average. And this happened in less than two years.
Gold stock Campbell Red Lake Mines climbed over 120%. This stemmed from a mere 10.8% rise in gold.
There was another boom in the 1990s. The average gold producer went up more than 200%…
Cambior rose 124%. Kinross Gold returned more than 190%. And Manhattan Gold & Silver skyrocketed over 760%.
All while gold only rose 8%.
Then, another big boom hit from 2001-2006. This one rivaled the boom of the early 1980s.
Gold returned 158%, while the average gold producer gained over 400%.
Newmont shot up 270%. Gold Fields soared over 500%. And Goldcorp returned over 800%.
As you can see, an increase in the price of gold (even a small one) can lead to huge returns.
And We’re Seeing This Play Out Today
Gold is on the rise again… and gold stocks are up even more.
From September 2018 through the end of January, gold has risen 10%.
Meanwhile, the VanEck Vectors Gold Miners ETF (GDX) – a fund that invests in a basket of gold mining stocks – is up 30%.