How to Know When to Buy Gold Stocks
Two key indicators are telling us something important…
Last week, I talked about how corporate profits as a percentage of gross domestic product (or GDP) and stock values as a percentage of GDP are diverging.
The former has been declining for several years now. The latter is approaching all-time highs.
It’s not sustainable.
Stock values should be going up because corporate profits are going up. They shouldn’t be going up when profits are going down.
Think about it… The more money a business makes, the more valuable that business is. But that’s not what is happening today (in terms of GDP).
This doesn’t mean the stock market is going to crash any time soon. But it does mean that investors should start looking for value in other places.
I’ve talked about commodities and markets other than the U.S. that are a better value right now.
Today’s chart is about another commodity… Gold.
The chart is the gold-to-silver ratio. First, a little background…
It’s a great indicator for knowing when it’s a low-risk time to buy and sell gold stocks.
(Note… A common way to measure this is by taking the price of one ounce of gold to the price of one ounce of silver. In this way, it measures how many ounces of silver you can buy with one ounce of gold. I’m using the ratio of the SPDR Gold ETF (GLD) to the iShares Silver ETF (SLV). Which measures how many shares of SLV you can buy with GLD. Just a different way to look at the same opportunity.)
Here’s a look at the chart…
As you can see, at the start of the previous gold bull market, the ratio hit 8.5 in mid-2008. The bull market ended when the ratio hit around 3.2 at the start of 2011.
During that bull market, gold stocks gained 310%.
During the bear market, the ratio went back up to about 8.4. During this time, gold stocks declined 80% from their highs.
You can see that the current gold bull market started at the end of 2016. Gold stocks ran up 151% before the latest pullback which sent gold stocks down 31%.
A sharp decline also happened in mid-to-late 2009.
It’s common to see big pullbacks in any kind of bull market. But they’re great opportunities to buy.
As you can see, based on the previous bull market, gold stocks have a lot more room to run. The ratio could fall below four before it’s all said and done.
If so, that means big gains for investors.
Look, no one can predict if gold stocks will go lower. Or if stock market will keep setting record highs.
But the gold-silver ratio is near its ten-year high. The stock market is at record highs and is in the second longest bull market in modern history.
This makes allocating more money to gold stocks and allocating less to the stock market an opportunity to consider.