Here's Why I'm Finally Buying Gold Stocks

 |  Includes: GDX, GDXJ, GLD
by: Frank Curzio

For the past two years, I've told investors to stay clear of gold stocks.

If you followed my advice, you avoided a 31% collapse in the gold sector.

But now, it's finally time to buy. And there could be big gains ahead...

Let me explain...

I've avoided gold stocks for the past two years for a few reasons...

The first was rising production costs. Almost everything miners had to buy in order to get gold out of the ground was getting more expensive. That includes heavy equipment, labor, electricity, and fuel. And gold prices were falling. In short, profits for gold companies were about to get hammered.

Second, for the past few years, inflation has been almost non-existent in most developed countries. Gold prices tend to rise the most during inflationary times. When people get worried about rising inflation and the devaluation of their money, they pile into gold and silver. But with low inflation, many investors see no reason to buy gold and silver.

Finally, gold was not a good investment compared to stocks. For the past few years, stocks were trading at dirt-cheap valuations and raising their dividends. Why own gold (which pays no interest), when you can buy a great business like chip-maker Intel or oil giant Exxon Mobil at cheap valuations and collect a yield of more than 3%?

With these headwinds facing gold stocks, I told readers they were better off investing elsewhere.

But now, it's finally time to get back into the gold sector.

You see, while production costs may still be rising, most gold companies have adapted to the tougher market conditions. They have shut down projects, sold off assets to raise cash, and laid off employees. Gold companies are leaner than ever today. They have to be to make a profit.

Inflation also looks like it's about to rise. In an effort to stimulate the economy, the Federal Reserve has continued its money printing and has kept interest rates near record-low levels. Now, other countries around the world are following in America's footsteps.

Japan is expanding credit and purchasing government bonds to stimulate its economy. The European Central Bank cut interest rates for the first time since 2012. China recently cut its corporate tax rate and increased infrastructure spending. And in the past few months, Australia, India, Turkey, Denmark, Israel, Poland, Mexico, Kenya, and South Korea have all cut interest rates.

This will create a huge amount of cheap money that will eventually result in higher inflation around the world. And we're already starting to see inflation head higher. Last month, the Consumer Price Index – how the Fed measures inflation – rose by 0.4%, which is the largest increase in more than a year.

Even the hint of higher inflation could push gold prices – and gold stocks – much higher as investors, worried about the devaluation of their money, pour into gold and silver.

But even if we don't see higher inflation right away, gold stocks are still attractive today based on valuation. Many dividend-paying stocks are now trading at record highs. But many gold companies are still more than 30% below their 2013 highs... making them cheaper than dividend-paying stocks.

In short, gold stocks now offer a good alternative to buying expensive dividend-paying stocks. And it's likely they're headed much higher as inflation starts to rise around the world. Based on the risk-to-reward ratio, I plan to recommend several gold stocks in my Small Stock Specialist and Phase 1 Investor newsletters over the next few months. I suggest adding a few gold stocks to your portfolio as well.

Disclosure: None