Gold stocks may be the next big gainer if history has to be believed

There is always a big chance of gaining from the imperfections in the markets. Irrationality in the markets are the way to big investment gains. When the markets get reflexive it is time harvest the profits from them. Reflexivity of the market means that markets become self-feeding. As George Soros puts it, there are two things for markets to be reflexive, leveraging and trend spotting.

Gold prices 10 aug

Now if we look at the current mortgage crisis, it started with rising prices of properties and easy availability of house loans from the banks which lead to high leverage and housing prices kept on sky-rocketing till it became a bubble. But in this course of becoming a bubble the mortgages helped banks make strong balance sheets. Hence, for a period of time, it produced an opportunity make gains before it became a bubble.

Demand_and_supply

Applying this logic in current metal markets, we see Gold, Silver, etc. metals prices are rising, it is still far from leveraging being done on high scale in these assets, so it is not a bubble yet. Prices may shoot up very high if the leveraging starts in metals. There is leveraging going on in metals but it is still very small amount. This was about leveraging.

Gold stock vs Dow

Now moving on to trend spotting: we know that the gold prices have move up a lot but gold stocks have not moved much. There is still lots of catching to be done by Gold stocks. When Gold prices are moving up and demand is rising then the stocks of mining companies should also rise. This has not happen yet and if the current financial mess continues then we might see a rally in gold stocks too which have been underperforming the bullion markets since very long.

Gold stock returns

This has happened in the past. During great depression we saw DOW Industrial Average fell dramatically but Gold stocks yielded huge profits. Homestake  Mining companies gave a return of 474% while DOW gave negative returns between 1929 to 1933.

Gold stock prices have already started moving now to do the catching up and it may be a good time to invest and make good profits.

Hitesh Anand

I am a post graduate from Newcastle University, UK. I like studying and analyzing economic data and financial health of world.

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