MIAMI, Aug. 11, 2020 /PRNewswire/ -- Due to the unprecedented crisis that is the novel coronavirus pandemic, investors are scrambling for the best sector in which to protect their money. In this free-for-all new normal, some picks have generated surprisingly positive returns, including gold and silver stocks. Typically, conservative investors avoid this market due to its historical volatility. However, for the risk-tolerant, it may be time to throw out conventional thinking.
We are going to look four names that have crossed my radar screen:
Gold Resource Corporation, Galiano Gold, Avino Silver & Gold Mines, Comstock Mining
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As you know, gold recently printed all-time intraday highs. Though the yellow metal gave up some gains last Friday, the precious metals have generated sizable returns this year. A contentious market in the best of times, some are downplaying the bullishness as unsustainable exuberance. However, there's another way to look at gold and silver stocks – as an indictment against the old guard.
Mentioned by the Wall Street Journal, a weak dollar has bolstered momentum in gold bullion. Currently, deteriorating relations between the U.S. and China – in which the two nations shut down each other's consulate offices – pose substantial worries. Another WSJ report noted that prior to this latest flare-up, economic ties helped soothe tensions. Now, businesses have less influence on this perhaps most critical geopolitical relationship.
But you don't have to look too far to appreciate the case for gold stocks to buy. Because of the panic associated with the pandemic, which at least partially contributed to the present social unrest, gun sales have skyrocketed. Really, this was a no-brainer. During emergencies, people instinctively realize that the police may not be able to respond immediately. Thus, they have taken matters into their own hands.
Beyond the fear and doom-and-gloom events, gold responds cyclically to major societal paradigm shifts. If you compare average annual returns of gold versus the Dow Jones since 1970, you'll recognize – perhaps to your shock – that gold performs slightly better than the Dow. By my calculations, it's 10% versus 8.3% in favor of gold.
However, the returns aren't balanced across the years; as I just mentioned, they're cyclical. On average, gold and stocks share an inverse relationship – as one goes up, the other goes down and vice versa. In the 2010s decade, the Dow bested the return of gold bullion by a margin of 11.7% to 4.5%.
If history is any guide, gold and more specifically gold stocks should outperform the Dow. Fundamentally, it's not difficult to accept this forecast. We've already nuked trillions into a flailing coronavirus recovery strategy. As well, rising permanent job losses may continue to haunt our nation for years to come. This crisis is begging for investors to make the rotation into precious metals.
And given this powerful backdrop, investors likely have a higher probability of scoring huge gains among small-cap gold and silver stocks. Though still risky because of their volatility, these smaller names may benefit from a "rising tide lifts all boats" dynamic.
Further, for the intrepid investor, these small caps offer ample technical opportunities. To establish this case, I will rely on scatter plot charts for the below gold and silver stocks, specifically analyzing the relationship between the target stock price and its derivative (month-over-month percentage change).
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