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Why gold stocks are soaring and whether you should buy

At first glance it would appear to have been a surprisingly calm few days on the ASX. While in the US the S&P 500 (INDEXSP:.INX) has dropped 2.3% since last Friday, the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) is registering a gain of 0.1%.

However while the ‘distant’ view tells one story, major gold stocks – which can be a handy measure of fear – appear to be telling a different story. Since last Friday some gold stocks have been soaring. For example:

Likewise the precious metal has been gaining ground too with the gold price rising above US$1,300 per ounce. The gold price has now gained around 8% this calendar year which puts it a long way ahead of both the local bourse and the US equity indices which are both roughly flat.

With the US financial press dominated at the moment by headlines such as “‘Scared, Dennis Gartman: Get out of stocks” and “Why the shakeout in stocks is likely to persist”, it’s no wonder that gold is finding support. It is likely leading many investors to ask themselves the question – whether it is time to increase their exposure to gold?

It’s a fair question but unfortunately the answer isn’t clear cut. Unless you hold a very high conviction that a significant and sustained fall in equities is imminent then jumping into gold stocks may not turn out well. Of more importance perhaps is the support the gold price is finding above US$1,300/ounce which can give investors some confidence as to the profitability of many gold producers. It is now three months since gold bounced off the US$1,200/ounce level, which is often viewed as the all-in cost for many producers.

Foolish takeaway

Unless you are prepared to do a lot of digging and acquire a sound working knowledge of the gold market so that you can profitably invest in gold companies investing in gold is a dangerous game to play; as appealing as it may be to add a hedge to your portfolio in the form of physical gold or gold stocks.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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