Bill Fleckenstein: Gold stocks as investing strategy -- good signs on price

Contrarian Chronicles5/28/2010 3:00 PM ET

Waking up to the golden rule

There are signs that investors are realizing the real value of gold -- and that gold stocks are like owning a piece of the moneymaking machine.

By Bill Fleckenstein
MSN Money

Gold stocks are too often the market's whipping boys. To the delight of yellow-dog devotees, however, that changed May 25.

That's when gold stocks were the port in the storm, in a session otherwise devoted to the selling of equities generically.

At the moment, gold stocks have a triple threat working in their favor -- lower oil prices, a strong dollar and higher gold prices -- to benefit their earnings and cash flow. That, finally, has caught the eye of Wall Street. An analyst, pulling a page from past cycles in other industries, raised his price target on the precious metal for 2011-12 and upped his opinion on a handful of large gold stocks.

As I have noted repeatedly, part of the reason gold stocks have been held back is because of worries that the price of gold itself will ultimately, and perhaps soon, head way back below $1,000 an ounce, from about $1,200 now. But I have also pointed out that when this mindset changes, gold stocks should perform better.

In any case, I find the teeth-gnashing odd, given that gold has been a longer-surviving monetary asset, by a factor of almost 100, compared with the short life span of the average paper-currency regime.

Gold is the standard; paper is fleeting

It's interesting that our speech is riddled with references to gold as a very desirable asset to possess. People talk about such-and-such being "as good as gold" (while you never hear "as good as colored paper"). They'll describe some great business as "a gold mine" or talk about "the golden rule" as though it's an ironclad law. Yet most people continue to treat gold like dirt, or worse.

As an asset, gold has helped protect and deliver gains versus paper money for 10 years running, yet the popular media heap nothing but scorn on it. Even people who own gold seem to regularly suffer angst, based on the questions I receive in the "Ask Fleck" section of my website (registration required).

Meantime, Bubblevision and other media outlets persist in telling you how great stocks are, although that asset class has cost people money for a decade.

The current level of skepticism is nicely illustrated by the recent short-interest surge in SPDR Gold Shares (GLD, news, msgs), the gold exchange-traded fund. The number of bets that gold will go down has now doubled, standing at about 30 million shares (the equivalent of about 3 million ounces).

Meanwhile, when the gold market recently fell out of bed, ETF holders at the margin liquidated no ounces and in the past couple of days invested enough new cash in the fund to equal a whopping 50 tons of gold. (This trend toward gold is occurring in other places around the planet as well.) Thus, as a wise commodity-trading friend said many years ago, you can be with the trend and still be contrary.

While I don't believe gold is a totally contrarian concept, it is contrary from the following standpoint: There are few avid believers, even though the list of high-quality investors who now hold gold has become quite impressive (they include John Paulson, David Einhorn, George Soros, Marc Faber, Felix Zulauf, Paul Jones and Fred Hickey).

I keep waiting for the day when folks realize that if you invest in the shares of a gold-mining company, you basically own a piece of the money-creation machine. It's sort of like owning a piece of a central bank that isn't staffed by losers.

A new gold standard?

On the subject of central banks, an interesting development has occurred. To wit, world markets have been sending a message -- contrary to what then-Federal Reserve chief Alan Greenspan tried to refute for 20 years -- that they are in fact bigger. He and other charlatan central bankers everywhere have wreaked massive havoc on the world for two decades. The sooner they're seen for the clueless incompetents that they were and are, the sooner the world can start thinking about how best to pursue sounder policies, including a new gold standard.
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A final word, with respect to the upgrade accorded to some of the mining companies last week (by the aforementioned analyst, who works at Deutsche Bank, no small bucket shop): I don't want to make too much out of a single data point, but I believe that this upgrade may be a harbinger of future action, as the naysayers embrace gold at some point. That will be a sight to behold.

At the time of publication, Bill Fleckenstein did not own shares of any equity mentioned in this column. He does own gold.

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