Mar 16, 2007

Casey Research: A Walk on the Sunny Side

Snippet from Casey Research newsletter "The Room"

"..Okay, now let’s get to the real fun. The kind of laugh-out-loud, do-a-silly-little-dance kind of fun.

I refer to the mood I found myself in all week. First, in the earlier part of the week, when watching the price of gold falter due to the aforementioned “flight from risk”… knowing as much as one can know, that gold would bounce right back.

And knowing in my heart of hearts that the gold stocks knocked back would quickly rebound and continue their somewhat jagged trajectory to the moon. (To say that Doug and I have been buying with both hands and both feet this week would be a serious understatement.)

That gold and the gold stocks have performed exactly as expected, refusing to stay down, has just added that much more sunshine to the week and snap to our steps around here at Casey Research.

It is important, even critical, however, to clearly keep in mind that bull markets make anyone on the right side of the trade think they are smarter than they actually are. And so one has to be constantly on guard against arrogance, because pride really does come before the fall (just think about all those people you know who were profitably early into the dot-com bubble but failed to sell when the selling was good).

So, being on guard, I thought it would be worth revisiting the question of how gold stocks perform in a general stock market collapse.

As you can see from the chart below, while gold stocks and the broader markets, represented by the S&P 500, can move together, they can also move in distinctly different directions.

Look especially at the time period around the last big stock market meltdown in 2000. While there were spikes in the volatility of gold stocks during the period, the general trend for gold stocks was up at the same time that the general trend in broader stock indices was decidedly down.

It is worth noting that while the market was suffering a solid thwapping (a technical term meaning a hard slap up the side of the head) during this period, it was not related to a monetary crisis, nor even any particularly dire economic fundamentals, but rather the panicked unwinding of a speculative bubble in dot-com stocks.

By contrast, the crisis now closing in on us is all about a monetary meltdown… a set-up that can only favor gold. Even so, the picture below paints a pretty clear picture of gold’s – and gold stocks’ – role in a market crisis.

Sit tight, and you’ll be more than alright.

David Galland "

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