Gold has rocketed to new highs…
Yesterday, the price of gold jumped 1.3%. It closed the day at its highest level since June 2015. It’s up 13% on the year…
Gold is a commodity like coffee, copper, or aluminum. But unlike other commodities, gold is money. It’s held its value for thousands of years. Gold is a “safe haven” asset, which is why investors often buy gold when the stock market is struggling.
• The S&P 500 has fallen 9% this year…
Yesterday, it fell 1.4% to its lowest level since April 2014. Eight of the ten sectors in the S&P 500 are down this year.
All major U.S. indexes have struggled this year. The Dow Jones Industrial Average has fallen 8%. The tech-heavy NASDAQ has dropped 14%. The Russell 2000, which tracks 2,000 small U.S. stocks, has dropped 15%.
• Even FANG stocks are plummeting…
FANG stands for Facebook (FB), Amazon (AMZN), Netflix (NFLX), and Google (GOOG).
These four stocks were among the market’s best performing stocks last year. Netflix, the top performer in the S&P 500, surged 134%. Google, the tenth best performer, climbed 44%. But the S&P 500 as a whole ended the year down 0.7%.
Regular readers know FANG stocks propped up the S&P 500 last year. Over the summer, we noted that this was a sign to be cautious in the stock market.
A bull market is generally “healthier” when a lot of stocks are rising. When only a few big stocks are rising, like today, it suggests the market is fragile.
Think of it this way: A building is sturdier when a lot of pillars are holding it up. When only a few pillars hold a building up, removing one could make the building fall.
• Now FANG stocks are dragging down the market…
All four stocks are down more than 5% this year. Netflix has fallen 27%. Amazon has fallen 28%.
It’s a bad sign when the leaders of a rally start to stumble.
• U.S. stocks are still expensive…
The S&P 500 has a PE ratio of 20.3. That’s 31% above its historic average PE ratio of 15.6. A higher PE ratio means stocks are more expensive. When stocks are expensive like today, they have a lot of room to fall when a bear market begins.
Stocks don’t crash just because they’re expensive. Unfortunately, the market has plenty of other problems…
Although U.S. stocks have been struggling, they’re still technically in a bull market. By the mainstream definition, it takes a 20% decline to kill a bull market. The current bull market is one of the longest in U.S. history. Today, it turned 84 months old, which is 32 months longer than the average bull market since World War II.
Company earnings are also plunging. According to research firm Fact Set, 63% of the companies in the S&P 500 have reported fourth-quarter financial results as of Friday. Based on these results, the S&P 500 is expected to show a 3.8% drop in earnings for last quarter.
It would be the first time since the 2009 financial crisis that earnings fell three quarters in a row.
• Owning physical gold could save you from big losses…
Unlike most assets, gold tends to do well when stocks are crashing. Investors use gold as “wealth protection” because it has held its value through every financial crisis in history.
We also recommend setting aside some cash. Like gold, a cash reserve could keep you from losing a lot of money in a major sell off. It will also put you in a position to buy stocks the next time they get really cheap.
We also encourage you to watch a short presentation we recently put together. It explains other ways to protect and grow your wealth during a financial crisis. Click here to watch.
• Gold stocks have soared this year…
The Market Vectors Gold Miners ETF (GDX), which tracks large gold miners, is up 28% this year.
Gold miners offer leverage to the price of gold. For example, a 10% rise in the price of gold can cause gold stocks to rise 30% or more.
Two weeks ago, we pointed out that GDX was trying to “carve a bottom.” Dispatch readers know a stock carves a bottom when it stops falling, forms a bottom for a period of time, and starts moving higher. A carved-out bottom often signals that a stock is ready to climb higher.
GDX’s latest move confirms that it has carved a bottom, as you can see in this chart:
GDX has surged 31% over the last two weeks. It gained 20% just last week. It was the fund’s best week since December 2008, during the global financial crisis.
GDX is trading at its highest level since July. This is a very bullish sign for gold miners.
• Gold miners go through booms and busts…
Today, the industry is bottoming out from one of its worst busts ever. GDX has plunged 74% from its 2011 high. Like any cyclical industry, this big bust has set gold miners up for a big boom…
During gold’s last bull market, gold stocks soared 273%. During the gold bull market before that, gold stocks soared 206%. And gold stocks soared 602% during the gold bull market from 2000 to 2003.
We think gold stocks could surge as much or more during the next rally…
• To make the biggest gains, you need to own the best mining companies…
A fund like GDX owns both low-quality and high-quality miners. It will likely gain at least 200% in the next gold bull market… but the best gold stocks will go much higher.
Louis James, editor of International Speculator, travels the world looking for the very best gold miners. He visits mining projects in the most remote regions on the planet. He studies rock samples. He even gets to know management teams on a first-name basis.
In just six weeks this year, seven of Louis’ gold stock picks have gained more than 25%. And four have gained more than 40%.
You can get in on Louis’ best gold stocks by signing up for International Speculator. Click here to begin your risk-free trial.
Chart of the Day
Gold has crushed copper lately…
Today’s chart shows the ratio between the price of gold and the price of copper. The ratio rises when gold does better than copper.
As we’ve said before, gold is safe haven asset. Copper, on the other hand, is a key industrial metal. It goes into smartphone batteries, plumbing parts, and electrical wiring. Falling copper prices often signal weakness in the global economy.
The price of copper has dropped 35% in the past two years. It’s trading at a seven-year low. Gold is at a seven-month high.
As you can see below, the gold/copper ratio is at a six-year high. In other words, gold hasn’t outperformed copper by this much since the 2008 financial crisis. This chart is screaming that the global economy is in trouble.
Delray Beach, Florida
February 09, 2016
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