Saturday, August 31, 2013
Since reaching a closing high of 1,709 on August 2, the benchmark S&P 500 fell as much as 4.6% to 1,630. Many blue-chip stocks (like Coca-Cola and ExxonMobil) have fallen to multi-month lows. Meanwhile... as we expected... gold stocks are soaring.
From January 1 to its June 26 low, the major gold-stock index – the AMEX Gold Bugs Index (the "HUI") – suffered a gigantic fall of 53%. During this time, physical gold was in a deep correction. In response, investors pulled money out of gold and natural-resource investment funds... which forced money managers to dump shares at any price.
During periods of forced selling, incredible values appear. Several of our analysts – like Matt Badiali, Jeff Clark, and Steve Sjuggerud – have recently urged readers to go long gold stocks. And our daily trading service, DailyWealth Trader, written by myself (Brian Hunt) and Amber Lee Mason, urged readers to buy one of the highest-quality gold stocks on the planet, Royal Gold (
Royal Gold is an unusual gold company. It's a "royalty firm," not a conventional gold miner.
Regular readers are familiar with royalty firms. We know of no other publishing firm that has covered this idea from as many angles and in as much volume as Stansberry & Associates. We've written dozens of reports on these stocks... and we've conducted a great educational interview on royalty firms with gold-stock authority John Doody. (Read the interview for free right here.)
Royalty firms don't mine gold or silver of their own. Instead, they finance lots of early-stage mining projects, then earn regular payments – called royalties – on mine production if things work out. It's a safer, more diversified way to invest in the gold-mining business than owning a company focused on one big strike. And Royal Gold is one of the elite "blue chips" of the royalty group. When you can buy a high-quality royalty firm at depressed levels, you can make huge long-term gains.
And as we've demonstrated in DailyWealth Trader, you can also make huge short-term gains in royalty firms.
In our July 22 issue, we recommended buying Royal Gold shares. Shares were deeply depressed at the time, trading for $48. (That's down from $90 a share late last year.) Since then, gold stocks have enjoyed a huge rally. DailyWealth Trader closed out for a 26.9% gain in just over a month.
The huge rally in gold stocks demonstrates another investing principle we've gone great lengths to promote.
It's the timeless idea of trading "bad to less bad" situations. Longtime readers know it's an incredible source of low-risk profits. If you know just a handful of trading concepts, make sure this is one of them.
"Bad to less bad" is a phrase coined by True Wealth editor Steve Sjuggerud. It involves buying assets that have suffered through horrible times, digested those horrible times, and are poised to run higher. The horrible times can be caused by sectorwide downturns, natural disasters, or broad economic factors, like a recession.
After an asset suffers through a horrible time – like gold stocks did this year – no one will want to buy it. It won't appear on newspaper or magazine covers because publishers know the idea will repulse readers.
It's around this time – when most people can't stand the thought of buying that asset – that it will trade for less than its real, intrinsic value... or it will trade at a paltry level in relation to its earnings power.
In this kind of "bad" condition, you can often buy an asset for half of its book value... or just five times earnings (which is very cheap) because nobody wants to touch it.
If you step in and buy amid the pessimism, you can double your money if a bit of optimism returns to the market and sends the asset back to normal levels. Keep in mind, it doesn't take great news to double the price of a cheap, hated asset... it just needs things to go from "bad to less bad."
The great part of "bad to less bad" trading is that because of the pessimism surrounding the asset, your trade has little downside risk. Everyone who wanted to sell has already sold. The selling pressure is exhausted. The downside risk gets "wrung out" of the trade.
This dynamic makes "bad to less bad" trading a constant producer of low-downside/high-upside investing and trading ideas. But it takes a contrarian "iron stomach" to initiate these trades. You'll feel strange putting these trades on. Your natural crowd-following instincts will fight you. Very successful professional traders learn to see these feelings as confirmation that they're doing the right thing.
This is why one of my favorite classic trading quotes is "The hard trade is the right trade."
In 2011, Steve used this strategy to guide True Wealth subscribers into homebuilder stocks. At the time, the real estate market was still reeling from the housing crash. Homebuilder stocks were at depressed levels. Buying housing stocks seemed insane. They've since rallied as high as 100% off those levels.
Just like buying homebuilders seemed insane, it seemed insane to buy Royal Gold last month. Since then, it rallied 35% before pulling back recently.
In 2010, it seemed insane to buy offshore drilling stocks. BP's Gulf of Mexico disaster crushed the sector and led many to think we'd simply stop drilling for oil. Drilling stocks climbed more than 50% off their lows... in just a matter of months.
With all this in mind, what sector, stock market, or commodity seems insane to buy right now?
A few "beaten up" candidates are the coal sector, the secondary-education sector, the steel sector, and selected emerging markets.
Each of these sectors has been crushed for some reason. They should all at least be on your trading radar.
Coal has become a convenient target for politicians. The steel sector has been crushed because of a supply overhang and a sluggish global economy. The secondary-education sector is dealing with government investigations and lawsuits. Emerging markets are dealing with a slowing Chinese economy and local inflation problems.
There's no doubt in my mind that these sectors will eventually stage large "bad to less bad" rallies. They will be good for 50%... 100%... even 200% gains. The question, of course, is the timing.
Steve believes he's found the next sector ready for a huge rally. It's one of the best ideas I've seen him write about this year (and he's written about A LOT of great ideas).
It's a trade where Steve sees little downside (about 7% from these levels)... and triple-digit upside. (A double is easily possible.) Plus, if you're like me and you like to get paid to put your money to work, this idea is for you. The current yield on the position is around 4%.
We've put together a very short description of this idea, which you can read in less than five minutes. In this description, you'll learn more about the "low-downside/high-upside" nature of this trade, and how to try True Wealth with a 100% money-back guarantee. You can read this presentation here. (It's not a video.)
Date Range:8/22/2013 to 8/29/2013
Date Range:8/22/2013 to 8/29/2013