Now's the Time to Buy Gold Mining Stocks (ETF: GDX)

I believe now is the time to start accumulating a position in gold mining stocks if you haven’t done so. I’ve been watching the recent declines in the global stock market and waiting to see a reprieve from the down market days.

I believe we have seen uncertainty take certain shape in the market. There is almost no financial news source that either isn’t speculating on a summer long bear market or a possible large scale war in the Middle East creating a negative market environment. Gold is the only safe haven investment that I see in the uncertainty of the stock market.

I believe it is only a matter of time before the slew of hedge funds (which now number over 12,000 and control over $1 trillion) pile money into the metal. I remember reading a quote from Doug Casey that the majority of hedge funds are likely run by 20 and 30 something’s that have never really experienced a bear market. I believe these managers won’t know what to do if the market collapses and gold will provide the only reasonably safe way to invest in a bear market.

The relative inexperience of hedge fund managers is a repeat of the .com days where decisions at venture capital firms were being made by the same group of young Ivy League graduates controlling vast amounts of wealth. It’s no fault of theirs that old wealth tends to chase new wealth since new wealth is likely younger and more able to identify hot new ideas and investment vehicles. Old wealth should be able to smell an opportunity or concept that has been oversold by having the benefit of experience. A truly wealthy businessman knows that the ability to manage and keep wealth is equally as important as the skill to earn wealth.

Gold is likely going to be a stronger investment to preserve wealth in the next 1-3 years than holding USD in a high-yield interest bearing savings account.

I am going out on a limb to say the bottom for gold’s current correction will be $540-$550. I agree with a comment made by Peter Grandich in this recent article:

Reward now equals or surpasses risk, going forward ($50 lower and up to $500 higher is worth risking being aggressively long again).

I trust many of the comments made by Doug Casey and Peter Grandich. Both authors are more frequently correct than incorrect about gold and both agree that there is currently less downside risk to potential upside for the metal. Both see gold possibly passing $1,000. For Doug Casey it’s not a matter of if, but when, gold will pass $1,000. I made almost the exact same prediction in some of my earliest posts for gold passing $500.

I expect that gold’s potential downside is another $50-$60. I see the potential upside heading out of the summer into the end of 2006 at $200 with gold possibly reaching $800. We have the right mix of volatility in the stock market for gold to come into close proximity to the metals previous historical high of $850. Now is definitely the time to start building a cash position to invest in a mixture of gold and high quality stocks in any industry affected by an overly speculative bear market.