Saturday, September 2, 2017

Gold stocks are poised for a new bull market


The chart above shows the ratio between the HUI gold miners index and the Dow Jones Industrial Average.

As can be seen from the above chart gold stocks have performed terribly the last five years as compared to regular stocks. This can be expected as gold and commodities in general have been in a bear market for the last five years.

With stocks near an all time high and gold stocks now emerging from a five year bear market it now seems that a true contrarian would lighten up on regular stocks and place some bets on gold stocks.
However, it now seems commodities including gold appear to be finding new strength.


In my previous recommendation I suggested that platinum is undervalued relative to gold. Traditionally platinum trades at a premium to gold. If I think that the price of platinum is going to rise than I must also think that a rise in the gold price is probably a high percentage possibility.

In the past I have not had great success in picking individual gold stocks. In order to take advantage of the anticipated rise in gold I will be using an ETF. 

I like the Sprott Gold Miners ETF (SGDM). I particularly like this ETF because as the ETF website states;

"Sprott Gold Miners ETF seeks to deliver exposure to the Sprott Zacks Gold Miners Index (NYSE: ZAXSGDM). The Index aims to track the performance of large to mid-capitalization gold companies whose stocks are listed on major U.S. exchanges.

The Index uses a transparent, rules-based methodology that is designed to identify 25 gold stocks with the highest beta† to the spot price of gold, with each stock's weighting in the index adjusted based on its quarterly revenue growth on a year-over-year basis and the quality of its balance sheet, as measured by long-term debt to equity. The Index is rebalanced on a quarterly basis to incorporate the latest financial data into the screening process. The Index can also invest to a lesser degree in silver companies that meet the above criteria."

So instead of using a market cap weighting to select stocks for the index, this index is based on growth of revenue. This seems to me to be a better way of selecting gold stocks than just a pure market cap weighting. Rising revenue usually means rising production.

Rising gold miner revenue during a gold bull market should lead to those gold company stocks outperforming the market. That is my bet anyhow. 

I will be adding the Sprott Gold Miner ETF (SGDM) to the Coach Potato Contrarian Portfolio. I will make this holding a 5% position in the portfolio. I will probably scale into this position as gold seems a bit overbought currently.

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