Please ensure Javascript is enabled for purposes of website accessibility

Gold Delivers a Gut Check

By Christopher Barker - Updated Nov 11, 2016 at 6:37PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Precious metals look attractive as correction matures.

So much has changed, but nothing is different. That paradox describes the past several weeks to a T. The canyon of disconnect between late winter's gold fever and the exodus of early spring makes about as much sense as my opening line. The price action can be easily understood, but investor sentiment is a different beast entirely.

Like a cruel physics experiment, first-time investors who clamored for gold as the price soared through $1,000 have been flushed out of the market with an equal but opposite force. As the metal has retreated to $850, and especially in recent days, I have witnessed an erosion of confidence even among seasoned traders of precious metals. This correction is a deep one, to be sure, but it provides a critical gut check. If you've been shaken out of gold in recent weeks, then gold may not be for you.

In a long-term secular bull market for gold, corrections are par for the course. In fact, the correction of mid-2006 was considerably more severe than the present episode, and provided me with a gut check I'll never forget. Gold has fallen 16% from its peak this time around, compared with 21% from peak to trough in 2006. Silver in 2006 fell from $15 to under $10, for a loss of 33%. When compared to 2006, the current drop of around 20% to near $17 causes this Fool not one troy ounce of worry.

I'll admit my confidence was shaken in 2006, and I made the cardinal mistake of selling some positions into weakness. I regret those sales to this day, but that experience is what has permitted me to remain calm and focused throughout the present correction.

Tuning out the static
Long-term investors in gold and silver are no strangers to being on the flip side of conventional wisdom. A daily chorus of articles and commentaries from media outlets has begun to declare a reversal in the U.S. dollar, promoting a move away from precious metals, commodities, and related investments. As much as I wish it could be true, as the U.S. economy really needs a dollar reversal, I have seen no evidence of a fundamental shift. To the contrary, the Federal Reserve has demonstrated a clear bias toward economic stimulus and the normalization of credit markets while turning a blind eye to the dollar.

In markets as volatile as gold and silver, I consider it folly to try to time short-term movements. I maintain flexible long-term price targets, which I establish according to ongoing analysis of the underlying fundamentals, and as far as I'm concerned everything else is pure noise. As long as that fundamental picture remains unaltered, I stand my ground like Tom Petty.

While trimming some profits on each march higher and pressing positions on major dips can indeed tweak results nicely, the core positions remain intact because gold can make tremendous moves when you least expect it. With the popular attention gold has attracted of late, these swings are bound to become ever more frequent and more severe as the gold bull progresses. For the far-sighted Fool with the stomach for some serious volatility, opportunities abound.

My pain is your gain
Thanks to the depth of this correction, gold and silver bullion have retreated to prices not seen since January. Since mining stocks are effectively leveraged to the price of the metals, miners have fallen even more dramatically. So where to invest in gold and silver? Savvy Fools will decide for themselves an appropriate level of exposure to precious metals, and then spread that allocation judiciously among bullion proxies, major miners, intermediates, and perhaps a producing junior or two.

The Central Fund of Canada (AMEX: CEF) is a well-respected and time-tested proxy for bullion that holds roughly equal values of gold and silver bullion in its insured, audited vaults. A very simple, two-pronged approach to precious metals exposure could be achieved utilizing Central Fund for gold and silver bullion and the Market Vectors Gold Miners ETF (AMEX: GDX) for mining shares.

Among the majors, unhedged Newmont (NYSE: NEM) looks attractive after posting excellent results recently into a sharply declining gold price. Freeport-McMoRan (NYSE: FCX) shares have proven resilient on the strength of copper exposure, yet still sport a glimmering forward 2008 P/E of only 10.2.

Intermediate miner Kinross Gold (NYSE: KGC) earns four out of five stars from Motley Fool CAPS players despite having lost more than 20% in recent weeks. If it's juniors you seek, look for budding producers in politically stable areas that have seen the greatest percentage declines since the correction began, and you are sure to find some attractive candidates.

Most importantly, though, give yourself a gut check. Gold is not for every Fool.

The CAPS community is a free service with access to collective ideas about individual investment options. Join 100,000 other investors by registering with CAPS here and posting your own online portfolio today.

Fool contributor Christopher Barker captains yachts and writes about stocks. He can also be found acting Foolishly within the CAPS community under the username Sinchiruna. He owns shares of Freeport-McMoRan, Kinross Gold, and the Central Fund of Canada. The Motley Fool has a gilded disclosure policy.


Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Freeport-McMoRan Inc. Stock Quote
Freeport-McMoRan Inc.
$31.67 (0.86%) $0.27
Newmont Mining Corporation Stock Quote
Newmont Mining Corporation
$45.30 (-0.96%) $0.44
Kinross Gold Corporation Stock Quote
Kinross Gold Corporation
$3.52 (0.28%) $0.01
VanEck Vectors ETF Trust - VanEck Vectors Gold Miners ETF Stock Quote
VanEck Vectors ETF Trust - VanEck Vectors Gold Miners ETF
$26.62 (-1.88%) $0.51
Sprott Physical Gold and Silver Trust Stock Quote
Sprott Physical Gold and Silver Trust
$16.74 (-0.89%) $0.15

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/11/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.