How to Succeed When Others Fail: Take Advantage of QE3

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There are so many reasons to own gold and silver stocks right now.

With many of the gold and silver mining stocks suffering lately, there has been no better time to invest.

I have been saying this aggressively for the last few weeks and this past Friday, the bull signals came roaring.

Gold futures rallied almost 4% Friday, scoring their largest single-session increase since August. India, one of the top world buyers of gold, saw gold prices cross an all time high of Rs 30,000 per 10 gram level – showing us yet another example of gold’s purchasing power against worldwide weakening currencies.

According to the latest report from the U.S. Mint, sales of both gold and silver bullion coins rebounded strongly during May.

I suspect that gold is now back in a strong uptrend and we’ll soon see gold back above $1650, then $1700 very shortly. The May nonfarm payroll report came at less than half of what most economists expected, showing a shockingly weak 69,000 new jobs created. The Chicago purchasing managers index also missed expectations dramatically dropping to 52.7 last month; expectations were an increase from 56.2 to 56.8.

This, along with continued worldwide economic stumbles, sent global stocks falling. Asian stock indexes all closed lower and European indexes tumbled hard, with Germany’s DAX plunging 3.35 percent to end the week.

The S&P 500 ended below its 200-day moving average for the first time in 2012 falling more than 2%, while the Dow fell to negative territory for the year with a near 275-point dive.

A couple of weeks back in my Letter, “What I am About to Buy” I said the downside for stocks was apparent and strongly stated that when the other sectors begin to fail, investors will hurl themselves at the precious metals sector. If you missed that Letter, I strongly suggest you read it by Clicking Here.

Why? Because I made a strong point that while the stock market had more room to climb (which it did), it would eventually tumble (which it has). I also made a strong point that it was time to pick up shares of precious metals stocks as that happened. If you followed the Letter, not only would you have protected yourself from the drop in the overall market, but you could have reaped the near term rewards of the gains in gold and silver stocks.

I emphasize these points not to tell you that I was right, when so many others were wrong. I emphasize these points because there’s still much more room for profit in the gold and silver space, while dangers lie ahead for the other sectors.

The stock market could bounce from Friday’s low, but that won’t signal a clear. The real short term bottom would only be found if indeed another round of QE is announced, or the Greek mess is resolved. And I stress that it would be a near term bottom.

Where Others Fail The other sectors are now failing (why anyone would buy Facebook at its IPO price is beyond me.*) and its apparent that additional stimulus is needed to not only sustain a recovery, but to keep the economies of the world from crumbling.

(*The billion dollar fund managers who invested in Facebook at such a high price are either plain stupid, or they were lied to by a conglomerate of bigger players. Or they just don’t care because its not their money…)

As a result worldwide precious metals stocks climbed dramatically as smart investors left the failing sectors for precious metals stocks (see What I am About to Buy).

Barrick Gold surged over 7 percent, Goldcorp over 8 percent, Newmont Mining over 6% percent, and Agnico-Eagle Mines over 9 percent. The Market Vectors Gold Miners index (GDX) climbed 6.4% while the Market Vectors Junior Gold index (GDXJ) climbed nearly 7%. MAG Silver (TSX: MAG) (NYSE.A: MVG), one of my top silver picks, also climbed over 10% on the American side of trading. This all happened in one day.

Still Cheap Even still, shares of many precious metals stocks remain cheap.

The last time shares were this cheap, they rallied well over 250%.

With the markets clearly oversold, the upward momentum from any new buying will send these stocks rocketing much higher. Friday already showed us the violent nature of upswings in these oversold stocks. While gold and silver both rose 4 and 3% respectively, shares of many miners and explorers rose nearly 10%.

Is it time for the precious metals stocks to catch up with the price of precious metals?

An Oversold Market

When gold moves up, gold stocks generally move up right alongside. That’s been the historic mentality. It was like that in 2009 and 2010.

But last year we saw a significant discord between the two.

While gold prices continued to climb in 2011 gaining over 10%, gold stocks did the exact opposite falling more than 10%. The trend continued this year, except the gap between the two has widened to near historic highs.

That means the upside potential for gold shares clearly outweighs the downside risk.

A Major Turn of Events

Gold stocks are finally starting to outperform the metal itself. The GDX, which I have encouraged readers to look at, is up 15% in the past two weeks, even as gold spot prices have gained only 2.5% (see What I am About to Buy, section: It’s Time to Rationalize.)

This is an important signal.

The buying within the sector is occurring on large volume, indicating major investors are beginning to enter the oversold sector with major support.

This is in sharp contrast to the overall stock market which has been climbing this year with little volume and support (I explained this in a past letter.) That means if the stock market falls, it will fall fast. In contrast, if gold shares move up on high volume, it will move up fast and sustain itself.

QE3 to the Rescue?

The potential announcement of QE3 is a very misunderstood stock market trigger. Traders expect QE to give the markets a boost, but in reality it just gives investors a short term trading opportunity.

With the recent release of poor economic data in the US and continued European financial disasters, the thought of QE3 is becoming more prominent.

But before you go and invest in other sectors based on this prediction, ask yourself if the last QE really put the world economies in a better place? Are we sustaining any type of real growth? Are the economies of the world in a better position?

Nothing has changed since the last QE, except the world’s strongest and biggest countries are now in more debt with a massively expanded monetary base. So will QE make the world a better

place and send stocks climbing to new highs? I doubt it.

But there is one thing I know QE3 will do.

Take Advantage of QE3

It will do exactly what previous QE’s have already done: Increase the monetary base causing monetary debasement, increase worldwide debt levels, and achieve little to no growth. It will dig us into a bigger financial hole that we’ll never climb out of. All of this means one thing is for certain: The purchasing power of gold against the dollar will rise.

The ongoing simultaneous collapse of the banking systems and economies of the Eurozone is the most obvious trigger for the next phase of the financial crisis. That’s why the G8 nations have already pledged more money to prevent further disaster. It won’t work.

As confidence in paper money evaporates, expect gold to soar as investors rush into the only currency that governments cannot debase: Gold.

I stress that this opportunity to invest in undervalued gold mining stocks is a rare occurrence in a gold bull market which should not be overlooked.

Until next week,

Ivan Lo

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