Editor’s note: The historic losses in oil today halted the market’s recent rally.
Oil is one of the sectors hit hardest by the economic shutdown. With demand drying up, the industry has failed to slow production and is running out of storage space.
That led to today’s incredible plunge, in which the price of oil futures actually went negative – meaning oil producers were paying buyers to take the oil off their hands. All this dragged down the overall market. At writing, the Dow Jones is down almost 2% for the day.
It’s difficult to predict what’s next for oil. But during these volatile times, we like to turn to assets that offer more protection and stability – like gold. The metal has weathered every crisis and held its value for millennia.
But gold’s not just for maintaining your wealth. It can yield profits, too. Today, we’re sharing an essay from our resident commodities expert, Dave Forest, on a certain class of gold stocks that could surge in the coming months…
When the coronavirus pandemic hit, I heard the same question over and over…
“This is the crisis we’ve been waiting for. So why is gold getting hammered? Shouldn’t it be holding its value in a crisis?”
I pointed to 2008. The same thing happened then. When a crisis hits, people sell everything. Investors need to raise money, so they sell whatever they can.
And gold often gets hit even harder than other assets.
But we saw this same pattern back in 2008. Then, it looked like gold wasn’t holding up like it was supposed to… but in truth, it was an opportunity in disguise.
And looking back to 2008, we can also learn what stocks ended up benefiting the most just months later… and how we can take advantage of that same trend today…
Like I said above, gold sold off hard when this crisis kicked off.
That’s because there are plenty of people who want to get their hands on gold in a crisis. People sell into that buying trend because it’s one thing they can sell. There’s volume in it. So they can sell their gold to raise money.
The result is an initial flood of selling. This depresses prices.
In October/November 2008, gold dropped 22%. Then it stabilized. By February 2009, it was heading higher. That was the start of a gold bull market that lasted until 2011.
In the first couple of weeks of the coronavirus-related crisis, when gold dropped 12%, we saw a similar situation play out:
Gold stocks got hit, too.
The chart below compares the performance of gold major stocks and gold bullion to the S&P 500 since the crisis began in mid-February.
Gold has recovered its losses… and shot higher. Gold-mining stocks, as measured by the VanEck Vectors Gold Miners ETF (GDX), have now completely recovered their losses.
So gold stocks are back where they were prior to the crash. And folks who bought during the dip are up a lot.
Contrast that with the major U.S. stock market indexes. Since its peak, the broad S&P 500 is down 16%. The Dow industrial stocks are down 19%. And the tech-heavy Nasdaq is down 13%.
Over the same time, gold did what it’s supposed to do: It held its value and outperformed traditional stocks.
Looking ahead, it’s useful to take a cue from the 2008 crash…
History Will Repeat Itself
Within six months of the crash in September 2008, gold and gold stocks were on a bull run.
In early 2009, I started my first gold company. We caught one of the biggest bull markets I’d ever seen in my career. A lot of money poured into gold and gold stocks. Prices kept going up. With the larger gold stocks, that happened pretty quickly.
Another interesting insight is that for about six months after the 2008 crash, junior gold-mining stocks – stocks in smaller companies developing and exploring for new deposits – underperformed the larger gold-mining stocks.
This makes sense. People buy the well-known names first.
But then, starting in mid-2009, the junior stocks took off. By 2011, at the peak of that gold bull market, the juniors had outperformed the majors by more than 250%.
This next chart shows how junior gold stocks can explode higher…
Right now, the juniors are significantly underperforming the majors. It’s all in the chart below…
The result is a large and growing gap between junior and major precious metals stocks. At the far right of the chart above, we see juniors underperforming the GDX index by 22%.
That could mean a big opportunity in buying juniors right now. Prior to this correction, juniors and larger gold stocks were trading nearly in line with each other (left of the chart).
It’s typical in down markets that juniors get hit harder. They’re less liquid and perceived as riskier. So people sell them first. When buyers return – like they did in late March – they re-enter the larger stocks first.
But when precious metals really get going, juniors perform as well as – or better than – majors.
If you haven’t already, consider insuring your portfolio with a basket of junior gold stocks. You can buy the VanEck Vectors Junior Gold Miners ETF (GDXJ), an exchange-traded fund for junior gold stocks. Just remember: Don’t bet the farm on a single trade, and don’t invest more money than you can afford to lose.
Keep walking the path,
Editor, International Speculator
P.S. Even in the current drawdown, my gold picks are winning… In fact, we just saw a 37% gain in less than two weeks. And one of my recent picks is up nearly 322% since October.
That’s because I have an edge when it comes to picking winning gold stocks…
I have access to a NASA satellite, and an exclusive algorithm, that helps me find gold – from space.
See how you can take advantage of it right here.