February 9, 2006

Silly Season

As gold barges relentlessly ahead, novice investors are bidding mining stocks to seemingly ridiculous heights.

Last month, I warned you that the investing public had “discovered” gold and the gold stock market, and were flooding this tiny sector with new money. It was too early to call it a full-grown mania, but the baby had obviously been birthed, spanked and swaddled. Since then, the trends driving the yellow metal have done nothing but accelerate. Amid warnings that gold was drastically overbought and due for a correction, the metal paused briefly in a trading range between $550 and $560...and then took off again.

Correspondingly, the mining shares have not only gone along for gold’s ride, they have leveraged it, as one would expect in a full-fledged bull market. Particularly pleasing to inveterate gold bugs, speculative money has worked its way down into the small-cap exploration and development shares. The result has been bulging portfolios for those who got in early and price levels that, to experienced hands, look ridiculous. In short, it’s a new year, and a new gold market. By “new,” I mean dramatically different from what regular followers of this market have grown accustomed to. It’s a market deluged with new buyers, of a different stripe, who are now beginning to hit the market with levels of demand like nothing seen since the late 1970s.

At this trend intensifies, it will drive the price of gold, and the prices of gold mining and exploration stocks, to heights that seem unthinkable today. In other words, if current prices for many junior gold shares seem stupidly high...just wait. The market that we’ve been waiting over 25 years for has arrived. To take full advantage of this historic opportunity, make sure you take profits in some of the early winners from this cycle and then reinvest that money in companies with good stories and smaller market capitalizations.

Gold and silver bullion are always safe bets if you want to keep pace with the market. But if you want to maximize your money-multiplying opportunities in this new era we find ourselves in, taking aggressive positions in well-structured juniors is the way to go.

What The Future Holds

Looking at the longer-term picture, the current advance in gold is very reassuring for those of us with large, bullish stakes in this sector.

By reaching $551, gold had retraced 50% of the loss from the January 1980 peak at $850. The further we can put that $551 level behind us, the more certain we can be that this is a new, secular bull market...and one that should attempt to exceed the previous highs. Of course, most analysts are calling for a correction in the sector after such a furious rise. In this bull market, however, gold has shown a propensity to do what it wants, when it wants, with a preference to make the prognosticators look foolish.

So, I wouldn’t be surprised, and actually expect, the metal to post some impressive gains in the days ahead. There will be a correction, of course, but I don’t think we’ll see a significant pull-back until we get a bit further down the road.

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.