What Will Happen to Gold Shares in a Crashing U.S. Stock Market?

By: Doug Casey | Wed, Jan 25, 2006
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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

Author: Doug Casey

Doug Casey
Casey Research, LLC.

Doug Casey

Doug Casey is a highly respected author, publisher and professional investor who graduated from Georgetown University in 1968.

Doug literally wrote the book on profiting from periods of economic turmoil: his book Crisis Investing spent multiple weeks as #1 on the New York Times bestseller list and became the best-selling financial book of 1980 with 438,640 copies sold; surpassing big-caliber names, like Free to Choose by Milton Friedman, The Real War by Richard Nixon, and Cosmos by Carl Sagan.

Then Doug broke the record with his next book, Strategic Investing, by receiving the largest advance ever paid for a financial book at the time. Interestingly enough, Doug's book The International Man was the most sold book in the history of Rhodesia.

He has been a featured guest on hundreds of radio and TV shows, including David Letterman, Merv Griffin, Charlie Rose, Phil Donahue, Regis Philbin, Maury Povich, NBC News and CNN; and has been the topic of numerous features in periodicals such as Time, Forbes, People, and the Washington Post.

Doug, who divides his time between homes in Aspen, Colorado; Auckland, New Zealand; and Salta, Argentina, has written newsletters and alert services for sophisticated investors for over 28 years. Doug has lived in 10 countries and visited over 175.

In addition to having served as a trustee on the Board of Governors of Washington College and Northwoods University, Doug has been a director and advisor to nine different financial corporations.

Doug is widely respected as one of the preeminent authorities on "rational speculation," especially in the high-potential natural resource sector.

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