April 6, 2006

The Trend Is Up...For Now

In my last commentary, I noted that gold were anxiously awaiting some sort of trend to develop in gold, and might have to wait a couple of months before they got a trend they liked.

Well, it didn’t take that long. We got the trend within days, and it is decidedly up — or at least for now.

Why the caveat at the end of that statement? Because the market is getting a bit frothy. If not in a literal sense, what we’ve seen in precious metals and mining stocks over the past couple of weeks seems to fit at least the figurative description of an orgy -- a market in wild, devil-may-care abandon.

Much of the evidence is anecdotal: A flood of new financings, with brokers deluged by paper, companies furiously trying to get deals closed and money in the bank, and investors knowing they should sell something...but instead finding themselves continuing to buy like drunken sailors.

Some of the evidence is hard and cold -- like the TSX Venture Exchange hitting new volume records. Like gold surging toward $600 at a break-neck pace, and silver rising by leaps and bounds in anticipation of the silver ETF. And like the Gold Bugs Index surging to new records.

What is fueling this explosion? To a large extent, greed.

Sure, the dollar has begun a new downward trend, as rumors abound that Middle Eastern investors and institutions are dumping the greenback in their disgust over the Dubai ports deal. Added to the mix have been reports that a number of central banks in Asia and elsewhere are souring on the dollar and beginning to diversify their holdings.

Still, the fact remains that most investors are piling into this market not because of cold, objective analysis, but because they don’t want to miss the next big winners.

When things are going this good, it’s hard to pull out of the market. And, when they do bring themselves to realize profits, most investors can’t fight the temptation to put the money right back into new deals.

The end result is a house of cards that is getting built higher and higher. And if gold doesn’t maintain a steady, consistent, lasting upward trend, the house will come crashing down at some point.

Right now, all the talk is about gold hitting $600, and the upcoming launch of a silver ETF. But, as I’ve been warning my readers over the past few weeks, these key benchmarks also represent danger points for investors. I fully expect an exhaustive sell-off upon the launch of the silver ETF, and possibly a similar one in gold, if the spot price can’t clear $600 in impressive fashion.

And I’m not the only one, by far, looking at these benchmarks as potential exit points, so I would advise that anyone with highly leveraged positions in these markets begin dancing toward the door.

In short, I think gold, silver and the resource stocks are going much higher this year. But the current market environment argues for caution in the short term. Take profits where it makes sense, and certainly reinvest in carefully chosen, early-stage opportunities. But this is not the time to go out on a limb by getting over-exposed or over-leveraged.

Brien Lundin is the editor and publisher of Gold Newsletter, a publication that has ranked among the world’s leading precious metals and resource stock advisories since 1971. To learn more, visit www.goldnewsletter.com.