Why The Real Reason For Owning Gold Has Returned

And there was the mainstream thinking that gold was lifeless.

They had it written off.

Yet there it is. It’s back from the dead.

Not only that, but it’s flourishing. It’s as though it has a new lease on life.

So what’s next? Is this the end of the rally? Or will it drop in a heap again…just like this did in June?

Here’s our take…

We’ll be straight up with you.

This latest gold rally has had your editor completely unexpectedly.

We admitted as much yesterday to the old pal, Sound Money, Seem Investments editor Greg Canavan. Greg says it’s excellent to see that gold is doing what it’s supposed to do – relocate the opposite direction to the stock market.

That fits in with Greg’s look at the market right now, which is which stocks are on the verge of a big drop.

This ‘gold upward and stocks down’ relationship isn’t necessarily what happened for a lot of the previous five years. For much of the time stocks and gold flower and fell in unison.

But now the real reason for owning gold has returned. It’s not regarding trading gold like a reveal, it’s about the safety of owning gold while globe leaders crank up the volume on war…

Gold Doing What it Does Best

You have to remember a key reason why gold increases during war times. It’s not just because people are worried that the bank notes and coins will disappear.

It’s because historically governments have a tendency to ramp up the printing pushes during a war in order to pay for the war. Doing so naturally devalues the currency already within circulation. And that should imply a higher gold price.

So in a way, it’s good to see the gold price rallying so strongly in recent days. Contrary to the idea that gold was dead and buried, it’s doing exactly what it’s supposed to do. That’s good news.

Source: Goldprice.org

It’s why we recommend investors possess a significant amount of gold. It’utes to protect your wealth as well as investments against the war talk and printing presses associated with war mongering governments (US, United kingdom, France and Australia).

But the mainstream didn’t just too early consign gold to the rubbish bin. Most folks had figured resource shares would never recover either…especially gold stocks.

Gold Stocks Beat Gold

If you think gold has done well, climbing $150 (about 10%) in a couple of weeks, gold stocks did even better.

As you can see on the following chart, the Market Vectors Gold Miners ETF [NYSE: GDX] has gained 21.1% during the exact same time – twice the performance of physical gold.

And if you think that’utes good, the Market Vectors Junior Gold Miners Exchange traded fund [NYSE: GDXJ] has added 34% – three times the actual performance of physical precious metal:

Gold ETF – red line; Gold Miners ETF – blue line;
Junior Gold Miners EFT – yellow line
Source: Search engines Finance

However, we need to make one thing obvious. Buying physical gold as well as gold mining stocks isn’t the same thing.

In fact, they’re at the polar opposites of investing. Physical gold isn’t regarding getting rich. Physical gold is about protecting your wealth from government meddling. You should own physical gold.

You may have 10%, 20% or 30% of your wealth in gold…or maybe more.

Gold stocks (or any exploration stocks) are about betting and growing your prosperity. They’re about placing small wagers on the off-chance you could bag a large triple-digit percentage gain.

For gold stocks I doubt if you would have more than 10% of your share portfolio in a number of stocks. An individual gold stock might account for no more than 1-2% of your total wealth.

The thing is, you don’capital t need a big exposure to gold stocks because of the potential to make super-sized gains.

Of course, the other reason you shouldn’t have a large amount of your money in gold shares is that you can lose money too. The Market Vectors Junior Gold Miners ETF offers fallen 43.5% over the past year, and was down around 62.5% in June.

Don’capital t be a Fool

Look, as we wrote within Monday’s Money Morning, the recent resource stock rout has similarities to the dotcom boom as well as bust in the early 2000s, and the current tech stock recovery.

When stock markets boom, investors make a lot of bad investments. These people don’t buy a stock simply because it’s a good stock, they buy it because other stocks have gone up and they think their stock will go up too.

But when the boom finishes, they soon sort out the good stocks from the bad shares.

That clear-out has happened to resource stocks in recent months. The market has punished those companies that had little substance to them.

And this won’t be the finish of it either. Investors will be more cautious about where they put their money. That will be bad news for the stocks with little to no genuine prospects. But it will be great news for the real explorers and producers.

Just because investors shifted towards the quality technology stocks in recent years, so they’ll shift towards the quality resource stocks in the coming months.

That’s already started to happen. Just as people who thought 2001 was no more the tech boom look foolish today, those who say this is the end of the resource boom will look just as foolish 10 years from now.

Cheers,
Kris+