The correction in gold prices has clearly unnerved many of the newly-minted gold bugs.
The simple fact gold is not going up $20 a day has sent the “hot money” running for the exits.
Investors willing to wait out the passing storms and keep their eyes on the big prize, however, are going to do exceptionally well.
In fact, this correction is likely creating another great opportunity to reload on your favorite gold stocks.
It’s not just me who’s seeing opportunity in gold stocks now. Secretary Geithner, Chairman Bernanke, and Mr. Market have all recently signaled now is the time to buy gold stocks.
Secretary Geithner: Words that Will Live in Infamy
Over the weekend on ABC’s Sunday political show This Week, the Treasury Secretary took to the airwaves once again with plenty of focus-grouped phrases to attempt to help create the image of how worse the economy would be without the stimulus, bailouts, etc.
It didn’t take long for Geithner to get off script though. Nearly halfway through the interview he started looking ahead into the future and making some bold guarantees.
The following exchange reveals a lot of how the current administration views the massive and growing fiscal deficits and its ability to continue issuing bonds:
Jake Tapper: Is the United States going to lose its triple-A government bond rating? And what happens when the credit markets are no longer willing to buy U.S. debt?
Secretary Geithner: Absolutely not. And that will never happen to this country…
If history is any evidence, when a government representative completely rules out something from happening, it’s pretty much a sure bet it’s only a matter time until it does happen.
That’s why when a reassuring Treasury Secretary says “absolutely not” and “never,” we know the dollar’s fate is pretty much sealed.
Of course, Geithner isn’t alone. The Fed Chairman continues to see the green light to keep to the printing presses running at full speed.
Chairman Bernanke: The Only Indicator That Matters
As we’ve discussed before in Is The Free Money Party Over?, GDP growth, unemployment, and other bits of the financial news media’s “top noise” simply don’t matter too much to the Fed Chairman. The key economic indicator Bernanke is watching is consumer credit.
After all, the economic theory du jour finds deflation as the creation of all economic ills. And simply preventing deflation by any means necessary can prevent a depression will lead to prosperity and growth.
Despite how many things are wrong with that rationale, we know that means consumer credit growth is what will signal when the Fed starts hiking rates.
Right now, consumer credit is still contracting. Last week the Fed reported consumer credit for the 11th straight month. Consumers cut their debt loads by $1.8 billion in December. That’s a sharp drop from the $21 billion in November, but since it still signals a decline in consumer spending, it’s a green light for the Fed to keep fighting deflation handing out free money.
Mr. Market: Gold Stock Timing Indicator Says “Buy”
Bernanke and Geithner are signaling good news for gold is ahead, but it’s Mr. Market who is once again signaling now is the time to get back into gold stocks specifically.
In fact, the market is saying this is the best time to buy gold stocks since the markets were still jumping off their lows last spring.
The chart below shows the how many shares of Market Vectors Gold Miners ETF (NYSE:GDX) an ounce of gold will buy over the past three years:
As you can see, the current ratio is just shy of its highs from last April. That’s a very good sign for gold stocks.
We use this ratio as the market’s perspective on the staying power of gold prices.
A low ratio (high gold stock prices relative to gold) means the gold bulls are running strong and sentiment is high. Since the market believes the future of gold is bright, they’ll bid up gold stocks much faster than the price of gold. This is a time to sell gold stocks.
A high ratio (low gold stock prices relative to gold) shows sentiment is bearish the market believes gold prices are likely to fall. Investors sell their gold stocks as they expect earnings and cash flows to decline This is a time to buy gold stocks.
Right now, with the ratio well above its short-term levels and nearly double its long-run levels, Mr. Market is telling us it’s time to buy gold stocks again.
The Long and Short of It
At this point, the short-term outlook for gold isn’t looking too bright. Since the December highs, the price of gold has fallen more than 10% from recent highs. Meanwhile, the largest gold stocks are down more than 25%.
The medium and long-term outlook, however, hasn’t changed much at all. Consumer credit is declining signaling Bernanke will keep interest rates far too low for far too long. The U.S. government seems over-confident about the tremendous appetite from a government whose debt is growing at nearly three times rate as GDP.
The combination of bearish short-term sentiment and outstanding long-term fundamentals are likely creating another opportunity in gold stocks.
By Andrew Mickey