Editor’s Note: Longtime Daily readers know PBRG’s been “pounding the table” on gold and gold stocks. The metal was the best-performing asset of the first quarter of 2016 (up 16%). Many gold miners have risen over 100% in the first four months of the year.
So today we turn to a key gold speculation insider for his critical insights…
Louis James is the senior investment strategist at Casey Research. He’s also editor of International Speculator. Louis is renowned for his “inside out” understanding of the gold market, as you’ll see below…
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J. Reeves, editor, The Palm Beach Daily: Louis, can you explain why the five-year bear market in gold is over?
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Louis James, editor, International Speculator: Gold was up over 20% last Friday. That’s the “official” definition of a new bull market for many investors. Why?
There are a lot of factors, of course, but two are critical…
The first is that demand for physical gold—jewelry, coins, and bullion bars—has remained strong throughout the downturn. Every time gold reached a new technical low, it didn’t “fall off a cliff” as almost any other asset would.
That’s because buyers of physical gold (mostly in Asia) saw the bargain and rushed in to buy. After years of this, even the “paper gold” traders on Wall Street—price speculators with no intent of owning physical metal—realized global demand isn’t going away. A rebound became a matter of time.
That’s important, because if investors think a rebound is coming, they’ll want to act fast when they see a trigger. They won’t want to get left out—as a lot of mainstream investors were during gold’s last rally.
That brings us to the second factor: the Federal Reserve.
All last year, the U.S. central bank kept threatening to raise interest rates. Investors saw this as bad for gold. But the Fed kept backing off…
When they finally did raise rates (by a paltry 0.25% in December), the presumed damage to gold was already priced in. Gold was actually up slightly on the news. And then the Fed started backing off again…
They indicated they would raise rates four times this year… then maybe just two… but so far, nothing.
The latest numbers show that a June rate hike looks very unlikely. And no increase in the first half of 2016 casts doubt on the idea of two hikes this year.
In other words, it’s looking more and more safe to “get back in the water.” That’s the trigger I was talking about, and lots of investors are piling in. The naysayers at Goldman Sachs and other big institutions are having to eat their shorts.
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J.R.: Where do you see gold headed from here?
Louis: As much as gold has risen, the gold stocks have gone “gonzo,” and that makes them vulnerable to a big short-term correction. That’s if gold wobbles enough to put a scare into the market.
If that happened, it would be the best possible opportunity for those who are just coming into the game. As for the rest of us, if we’re smart, we’ll take profits along the way.
So we’ll use a correction to “back up the truck” for great picks we missed at the bottom. All the fundamentals say this bull market has a long, upward road ahead of it.
J.R.: PBRG recommends owning physical gold as a defensive form of “wealth insurance.” But owning mining shares is a different animal.
Who should own physical gold… and who should own gold mining stocks?
Louis: The two are very different. Doug Casey and I have been telling people for years that gold is not an “investment.” It’s money… the oldest and most enduring form in history. We own it for prudence—for wealth protection, as you say.
The gold stocks are speculations. We buy them for wealth creation. Each person has to determine his own mix based on his own priorities (wealth protection vs. creation) and risk appetite.
As for when to buy… buy on the dips and corrections, of course. Buy low.
But here’s the most important thing for investors to understand:
No one should kid himself into thinking he’s being “safe” or “conservative” by investing in “blue chip” stocks these days. Wall Street can and will fluctuate—violently—as all the world’s central bankers’ harebrained schemes work their way through the global economy.
Lots of people don’t want to be speculators. It scares them. I sympathize. But the sad truth is—in the post-Lehman, post-MF Global, post-Cyprus world—we are all speculators now.
The only choice we have is how to play the cards we’ve been dealt…
J.R.: The mining sector sports some of the highest volatility of any investment class. How can folks safely invest in the sector without doing serious damage to their portfolios?
Louis: First, seek unrecognized value.
Don’t try to time the market, look for things that are objectively undervalued. They’ll have more upside in them than downside, whatever fluctuations happen along the way.
Second, take profits as soon as you get your first double.
This way, you have just as much exposure to the upside as you started with, but no risk. I can’t overstate how wonderful it feels to have a stake in a great speculation in a highly volatile market with ZERO RISK.
We call this a “Casey Free Ride.” We have a bunch in our portfolio right now, so we’re ready for whatever happens next.
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J.R.: Is it too late for new investors to get in and enjoy similar gains?
Louis: No. But they need to be smart. Markets fluctuate… ours more than almost any other. You have to let the market come to you. Let that volatility become your best friend.
My personal motto is: Discipline pays.
J.R.: Thanks for your time and these critical insights, Louis.
Louis: Anytime.
Reeves’ Note: If you’re considering gold speculations, Louis’ special report—“9 Essential Gold Stocks to Buy Now”—is a must-have resource. The 37-page report details Louis’ top reduced-risk, high-margin recommendations.
If you want access, act now. This offer ends at midnight (Eastern Time) tonight. Click here to learn more.