Mining stocks: a cheaper play on gold

Compared to the wider stockmarkets, precious metals miners have performed well. But they haven't kept pace with gold's record highs. So now's the time to buy in while they're still cheap, says Steve Sjuggerud.

By moneyweek
published

"Do more of what's working, and less of what's not." That's what supertrader Dennis Gartman regularly writes.

This is the right advice. As Dennis has explained over the years, you'll get half of the gain of a bull market in the last 10% of its duration (i.e. in the last year of a ten-year rally).

Whether it's dotcom stocks or commodities, you never know what is heading straight up. But if you do more of what is working if you buy into the uptrend you have a chance at capturing big gains.

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The problem is, it seems like nothing is working right now. For example, I recently wrote about big drug companies. The sector is cheap and ignored two of the things I look for. Drug giant Pfizer is trading at just six times this year's estimated earnings.

But the problem with Pfizer (and the drug companies) is there's no uptrend yet. I'm buying at record cheap prices. But I know I'm swimming upstream to start, and that's not where I really want to be. We can do better.

So where's an uptrend now? What's working today?

Gold stocks are working

While everything else fell recently, gold stocks held on. The biggest names in gold stocks Barrick (NYSE: ABX), Goldcorp (NYSE: GG), and Newmont (NYSE: NEM), are all trading very close to new highs for 2010. The uptrend is in place here.

Also, relative to the price of gold, gold stocks are still cheap right now.

When gold rises, the profits of gold mining companies rise even more. So when gold goes up, gold stocks should soar.

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But get this: gold is up 30% in the last two years. Based on the tried-and-true rules, gold stocks should be up 60% or more, but they are only up 10% in the last year.

Gold has soared, but gold stocks haven't. They're cheap relative to the price of gold, and they need to catch up.

Gold stocks are ignored too. While there's plenty of talk about gold out there, the average man on the street doesn't own a gold stock. Heck, the average investor probably doesn't own a gold stock.

We have what I like to see: gold stocks are cheap relative to gold; most people don't own them; and, importantly, gold stocks are working right now. Remember: you want to own more of what is working and less of what is not. Gold stocks fit that bill.

An excellent way to get exposure to a handful of the top gold mining stocks is through shares of GDX, the Market Vectors gold mining stocks fund (NYSE: GDX). The three gold stocks I mentioned above make up over a third of the holdings in GDX.

This article was first published in the free daily investment email DailyWealth

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