Math Today, Magic TomorrowBy Jeff Clark April 28th, 2010...

Math Today, Magic Tomorrow
By Jeff Clark April 28th, 2010

http://www.dailyreckoning.com.au/math-today-magic-tomorrow/2010/04/28/


"Gold Stocks Are Still Going to Take Off, Right?

We think that at some point the public is destined to participate in precious metals stocks, and when they do, we'll see volumes jump and share prices take off.

But for now, gold stocks are playing follow the leader...

But just as we showed with gold last month, gold stocks will similarly propel higher when the general public crowds in, regardless of what the markets are doing.

As measured by the Barron's Gold Mining Index (a good substitute for the HUI that didn't exist), gold stocks rose 652% during the 1970s (through January 1980), while the S&P returned a wimpy 22%. The action in the '70s was definitely in gold and gold stocks, despite two recessions that decade, and we think a repeat is in the cards.


Is Now a Good Time to Buy?

As investors, our goal is to get positioned in the best stocks at the best price. And buying low assures us of more profit when we eventually sell. So, are gold stocks "low" right now?

We have a couple clues to help answer that, with gold itself offering the most important hint.

The HUI Gold Bugs Index, outperformed gold until 2008. Since then, gold stocks have underperformed gold by a fairly wide margin.

This gold-stock-to-gold ratio tells us that in our bull market, gold stocks are currently undervalued relative to the gold price. This doesn't mean they can't get cheaper, of course, but it does signal they represent good value and that compared to their underlying asset, there's lots of room to the upside.

So, if you have a long-term perspective and the patience to wait until gold stocks begin outperforming gold again, today's prices are good prices.


Just Tell Me When!

The #1 indicator that will tell us when gold stocks will take off has nothing to do with charts and is something you can monitor yourself: it will be when your neighbors and co-workers begin to express curiosity. You obviously want to be invested before them, but that's when things will start to get exciting.

So when might "gold fever" strike your neighbor? History holds the best clue:

In the 1970's bull market, gold stocks began their big ascent when the gold price hit about $450/ounce. Adjusted for inflation, that would equal roughly $1,340 today. So, when we see gold rise decisively above $1,300 and stay there, that just might be the trigger that spurs the interest of the masses in gold stocks. That's not a prediction, but it does give us an idea of what to look for.

Casey Research chief economist Bud Conrad was right when he called for gold breaking through the $1,150 barrier in 2009 - and now he's calling for gold to break over $1,450 by year's end. Weighing in as well, Doug Casey himself sees precious metals as the only asset class worth buying now, and gold stocks as being the best way to add speculative leverage to those investments.

Exciting? You bet. We're convinced that, sooner or later, higher prices are ahead for the best gold- and silver-producing companies, along with the "magical" levels that can happen in a mania. So, while we encourage caution, we also encourage selective participation so you don't get left behind. Waiting for the "perfect" time to buy is an exercise in self-deception; nobody can time the market.

Let's be honest: no one can guarantee when or if a gold mania will happen. But all of our research points to higher prices for gold (and silver), so we remain confident we're in the right sector. And we can make money before the mania gets here."

Jeff Clark
for The Daily Reckoning Australia