Monday, March 05, 2007

A Simple-Minded Commentary on the Recent Reversal in Precious Metals

March 6, 2007

Many observers have commented that gold and silver stocks, as well as many commodity stocks, have retreated more than general stocks in the recent sharp market reversal.

I concur that this is the case, and our portfolio has declined 15% in the last 5 trading days, or 3% a day. This is double the decline in gold and in the Dow Industrials.

Further, Adam Hamilton and Scott Wright have noted that the present advance of gold stocks in parallel with gold is
the most lackluster since the onset of the present precious metals bull market in 2001. As of today, precious metal stocks have demonstrated no leverage at all to the precious metals on the current upleg – in fact, they are now lagging.

Is the bull market trend petering out for precious metal miners?

How could it be?

When gold and silver advance dramatically in value, this inevitably benefits the miners (though mining is a difficult, arduous and often thankless business). 2006 Profits have been stellar for many of the miners, and this positive trend remains in its infancy.

Why then are precious metal stocks going down more than general stocks?

It is certainly possible that precious metal miners are now facing a reversal of fortune, but I am skeptical of this all-too-bearish explanation.

Let me offer a simpler answer.

The precious metal mining stocks go down more because they go up more. I think it is really as simple as that.

The gains have been dramatic since 2001, and a breather is not uncalled for. Technically, there are many forces of resistance to deal with at this juncture, most dramatically, the 3-1/2 decade downtrend in the value of gold mining stocks relative to gold.

Resistances are formidable technical hurdles in the world of investments – they are really a psychological barrier – and they typically require repeated advances and retreats in order finally to be vanquished.

The present reversal in precious metal mining stocks may not yet be done its course, though I suspect that most (perhaps 80-90%) of the reversal is now in. And the struggle may not yet be done. That is, the miners may advance once more and be turned back yet again.

But my gut sense is that the bull market is not over for the miners – rather, that this is only just the beginning of a multi-decade journey.

This would mean that the present ugly environment is a "wall of worry." That would make sense, as this phenomenon characterizes all bull markets, guarding them against unsustainable extremes in positive sentiment.

In my view, sentiment on the miners is already more negative than positive – and this means that there are many uncommitted investors out there who have yet to join us.

If this is a bull market for the miners as well as for the precious metals themselves, then I continue to foresee a bright future for the precious metal mining stocks – despite the all-too-obvious negatives that have dragged them down 15% or so in the past five days alone.

Gold and silver are worth much more than they were in 2001 and 2003 respectively, and this means that the gold and silver in the ground – in the miners' possession as proven, probable and inferred reserves – is also steadily climbing in value.

In my view, this simple fact will continue to translate into progressively advancing market value – that is, into continued rises in share prices.

If I am right, then the gold and silver mining stocks are a very good buy – right here, right now.

If you haven't committed to acquiring precious metal mining shares, then today – that is, Tuesday, March 6, 2007 – might just be a perfectly fine day to buy more of them.

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