Gold’s Multiplying Effect Is Back In Play

Written by Adam English
Posted July 16, 2019

Let me show you something a lot of people don't understand about the gold sector.

It'll perfectly illustrate how the herd is handing us a fantastic opportunity.

It is profoundly easy to make more money off the same basic trend just by picking the right ticker.

Right now it means the difference between being up less than 10% or up as much as 24.5%.

This is the gold multiplier effect, and it is back in play after a long hiatus.

What Just Happened?

Thankfully we can use a year-to-date chart to see this multiplier effect in action.

While the S&P 500 is posting about a 20% gain year-to-date, gold is sitting up about 15%.

The gold ETFs are split. The popular SPDR Gold Trust (GLD) isn't even at 10%.

Meanwhile, the gold miner ETFs soared, with the large mining sector ETF (GDX) up 24.5% and the junior mining sector ETF (GDXJ) up 20%.

gold comp chart 16july19

So what gives? Why the split between the price of gold and companies that are almost solely dependent on the price of gold for revenues?

This is actually how the gold market is supposed to look. Gains don’t happen at a one-to-one ratio. Gold miners, past a certain point, see nothing but greater profits.

Once the capital expenditures — which are massive, to be fair — are done, it is just a matter of pulling more and more money out of the ground.

The Contrarian Window Is Ending

For a long time, this effect was also muted by a lack of investor demand.

This is the stock market after all. If buyers don't show up in great enough numbers, there isn't as much upward pressure on price because there are fewer people bidding against each other for the shares that are for sale.

All eyes are on the broader market and the gains it is posting, with more traditional sectors and blue-chip stocks drawing in investor funds that are pushing valuations into the stratosphere.

While the crowd was focused elsewhere, investment in gold companies fell off.

That has most certainly changed and it is further multiplying the effect of gold price gains on gold miner share prices. The best gold stocks are already starting to draw renewed attention.

We’re looking at a small window where investing in gold stocks could still be considered a contrarian play.

Simply put, this is becoming a momentum play that looks like it'll continue for the foreseeable future.

About $5.4 billion flowed into raw-material ETFs in June, the biggest in three years, according to Bloomberg.

Of that, all but $140 million went into gold-based ETFs.

gold inflow june19

Simply put, gold was like a coiled spring with a lot of downward and upward pressure balancing each other out.

Economic, geopolitical, and market forces switched to push gold up, and the spring exploded up with them.

Investors have started to follow the trend.

The Best of the Breed

If you've been kind enough to read my articles in the past you know that I like gold but I'm not a gold bug.

I see a good reason to hold some in any portfolio but not a ton of it.

The goal, after all, is to generate gains without taking on excessive risk. Gold is a great part of that equation.

I can understand if people don't like gold at all. Warren Buffett is right, it is just a lump of metal that sits there and does nothing.

However, anyone who dismisses a gold market like this is doing themselves a massive disservice by letting their gut make the call. Be agnostic about the source of your gains.

Mr. Market is handing investors a great way to profit and the trend has long legs. Take advantage of it while you can.

Now is the time to get in on the best miners. The ones with experienced management, cash reserves, and large high-grade deposits the majors will pay a premium to joint venture or buy outright.

Gerardo Del Real has been building a portfolio that does just that for his Junior Mining Monthly  readers, and it's not too late to join them and take advantage of gold's multiplying effect.

Take care,

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Adam English

follow basic @AdamEnglishOC on Twitter

Adam's editorial talents and analysis drew the attention of senior editors at Outsider Club, which he joined in mid-2012. While he has acquired years of hands-on experience in the editorial room by working side by side with ex-brokers, options floor traders, and financial advisors, he is acutely aware of the challenges faced by retail investors after starting at the ground floor in the financial publishing field. For more on Adam, check out his editor's page

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