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The Best Way to Profit from Gold Now

By Dr. Steve Sjuggerud
Monday, November 7, 2011

"We believe gold will continue to rise... We expect gold stocks to do even better."
 
That was famed hedge-fund manager David Einhorn on a conference call last week. Einhorn isn't a lifelong gold bug... But he likes gold now. And lately, he's been switching out of the metal itself and into gold mining stocks...
 
Einhorn believes a "substantial disconnect has developed between the price of gold and the mining companies."
 
A month ago in my True Wealth Systems letter, I wrote the same thing... "Gold stocks are 19% undervalued," I said. "Whenever gold stocks have gotten this cheap by this measure, triple-digit returns have followed soon after."
 
It's happened three times in the last eight years. The longest it took to double your money was 13 months.
 
I reiterated buying shares of GDX (NYSE: GDX) – the gold stocks fund – in last month's True Wealth Systems letter. Shares of GDX are up 16% since I wrote that. So we're buying GDX... and David Einhorn is, too.
 
I had a new recommendation in last month's True Wealth Systems as well... buying shares of junior gold mining companies (through GDXJ – the junior miners fund).
 
Here's what I wrote:
 
Junior gold mining companies have been hit even harder than the major mining companies...
 
Junior miners tend to deliver roughly twice the performance of gold – in both directions. Right now, junior miners have horribly underperformed... and could rally dramatically if gold's bull market returns.
 
Since I wrote that, junior gold mining stocks have soared... But the dramatic discount is still there. Take a look...
 
Junior Gold Miners Usually Track the Double-Long Gold Index
 
We have three possible outcomes:
 
1.    Junior gold stocks soar to catch up with gold.
2.    Gold falls dramatically, narrowing the discrepancy.
3.    The discrepancy is "real," like late 2008... when all assets fell, regardless of value.
 
I believe choice No. 1 is what will happen. But even if gold does nothing or falls, we could still do just fine... Einhorn explained why this week:
 
With gold at today's price, the mining companies have the potential to generate double-digit free cash flow returns and offer attractive risk-adjusted returns even if gold does not advance further.
 
Gold stocks are cheap. Historically, they've brought home triple-digit returns within 13 months when they've been this cheap. Our systems say buy them. And one of the best hedge-fund managers is buying them, as well.
 
Consider buying shares of GDX or the junior miners with GDXJ today.
 
Good investing,
 
Steve




Further Reading:

"If gold continues to rise," Steve says, "this investment could deliver huge gains. It's happened in all previous gold bull markets." See what he's talking about – and how to get in on what Steve calls "the best deal in most of our lifetimes" – here.
 
Two weeks ago, editor in chief Brian Hunt predicted a rally in gold stocks... calling them a low-risk, potentially high-reward trade. He was right. Over the next week, gold stocks ripped nearly 10% higher. But Brian says the rally is far from over... See the chart that proves it here.

Market Notes


NEW HIGHS OF NOTE LAST WEEK
 
Starbucks (SBUX)... Big Coffee
MasterCard (MA)... credit cards
Cabot Oil & Gas (COG)... oil & gas
American Tower (AMT)... cell towers
Kanas City Southern (KSU)... railroads

NEW LOWS OF NOTE LAST WEEK
 
Sony (SNE)... giant Japanese electronics maker
Toyota (TM)... giant Japanese auto maker
Mizuho Financial (MFG)... giant Japanese bank
Rosetta Stone (RST)... language courses
Texas Industries (TXI)... construction materials
St. Joe (JOE)... land developer
National Bank of Greece (NBG)... Greek crisis
Cablevision Systems (CVC)... cable television

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