How to Find Opportunities from Blood, Debt & Fears

As we’ve indicated many times in recent months, a better opportunity for gold investors appears to be in gold mining companies. Coxe agrees, as he believes today represents the “greatest devaluation of precious metal stocks.” In his experience, he thinks there has never been such a disparity in precious metals stocks compared to the price of gold. There are two reasons for this: In the 1970s, the gold ETF did not exist, so speculators who wanted gold exposure had to purchase bullion. Also, gold miners have faced higher labor and energy costs as well as increased capital expenditures.

Coxe also brought to our attention the Investor’s Business Daily’s Industry Sub-Group Rankings, which lists six-month performance to help investors identify potential growing areas of the economy. Out of 197 groups, the third-ranking member on the list was gold mining companies.

Over the last several weeks, gold has received a lot of attention and we’ve discussed gold stocks and gold bullion quite often. If you were out trying to squeeze in one last summer vacation, here’s what you missed:

• Valuation Gap Makes Gold Miners Attractive But All Miners Aren’t Created Equal
• The Neverending Story of a “Gold Bubble”
• Will Gold Equity Investors Strike Gold

You can also join us for our gold webcast this Tuesday. I will be joined with special guest Jason Toussaint, managing director of the U.S. and Investment for the World Gold Council. We will be discussing A Case for Investing in Gold at 4:15 pm ET. Sign up here.

Two Recent Developments for U.S. Stocks

What hasn’t gotten a lot of attention in the media is growing money supply. Instead, much of the media has focused on day-to-day, even hour-to-hour, data. However, it is a key lubricant of the economy and financial markets.

The Federal Reserve influences money supply growth, and as can be seen in the chart below, money supply often spikes during crisis or uncertainty, such as Y2K, 9/11, the collapse of Lehman Brothers and the ensuing financial crisis. The current environment of sluggish growth, government austerity and worries over the European banking sector has likely influenced the dramatic rise in money supply over the past 18 months. The Fed likely errs on the side of caution to stimulate growth as inflation is not currently a concern.

Generally speaking, if money is growing faster than nominal GDP, that excess money tends to find its way to other uses such as investment in stocks, commodities and other financial assets. The relationship between money supply and financial assets is nonlinear and changes over time, but when tallying up pros and cons for the current environment, the recent increase of more than 8 percent in money supply growth provides a tailwind for commodities and stocks.

Equities look particularly attractive relative to bonds, especially today. During the last 40 years, the yield on the S&P 500 has rarely exceeded the yield on the 10-year Treasury bond.

For the long-term investor, the risk/reward profile for owning stocks appears positively skewed. Equity investors have suffered through one of the most difficult decades—rivaling even the Great Depression—while bond investors have enjoyed a 30-year bull market. Long-term mean reversion is a powerful tool that investors can use to help them attain their long-term goals.

It’s worth repeating the famous quote from Baron Rothschild, an 18th century British nobleman and member of the Rothschild banking family, who is credited with saying that "the time to buy is when there's blood in the streets."

It has been “bloody” recently and that is precisely the time to have the courage to make long-term investments at favorable prices.

John Derrick, Director of Research, contributed to this article.