May 15, 2006

Trading Places

As you can see from the accompanying chart, throughout gold’s impressive surge over the past couple of weeks, the mining stocks have been remarkably reluctant to follow along, much less show the type of leverage they’re famous for.

There’s a common perception among investors that mining stocks lead the metals in a bull market. In actuality, gold and the equities frequently exchange leadership positions. During the amazing rally in gold over the past two months, the mining stocks have been reluctant to follow gold’s lead — the only leverage they’ve exhibited has been to the downside.

For example, on Friday, May 12, gold closed down $9.60, or 1.33%. Yet the Gold Bugs Index dropped 18.61 points, or 4.81%...three times as much as gold on a percentage basis. That’s not unexpected, but it would be nice if the equities offered a little more punch in the upside direction as well. (Note that the accompanying chart uses London PM prices, and using those numbers gold was actually up on May 12.)

So what’s been driving this interaction? It could be that official actors, and their allies among the bullion banks, are intentionally pushing mining stocks down in an effort to stem the rally in gold. This would allow them to cover their losing short positions more easily.
Or, it could simply be that mining stock investors have grown cynical of this amazing rally in the metals, are sensing a correction around the corner, and are taking cover while they still can.

What is my view? I think it’s a bit of both — there are definitely some powerful institutions with short positions in gold that are deeply, deeply underwater. And these days, it doesn’t take much selling to spook late-coming longs out of the mining stock market.

What remains to be seen is whether the mining stocks will be right in predicting a significant correction in gold, or whether gold is indeed the leader right now...and the growing legions of physical gold buyers will continue to drive the price skyward.

As you know, I think a correction is coming up, and it’s possible that the recent sell-off represents the leading edge of it.The next few days and weeks will be interesting, indeed.
If you’re of a mind to play the market’s current emphasis on physical gold, the very site you’re on right now offers the most cost-effective and hassle-free way that I know of to buy bullion. Besides being the preeminent source for up-to-the-second metals prices and data, Kitco is one of the most widely recommended bullion dealers in the business. They’ve certainly earned my trust and recommendation.

As for mining stocks, I continue to advise a prudent, middle-of-the-road strategy. To wit: If you have large, long-term gains in specific stocks, don’t be afraid to take some of your money off the table. And don’t put the cash right back in the market at current, inflated prices; wait patiently for a correction to deliver some bargains.

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 about Gold Newsletter, visit www.goldnewsletter.com.

Mr. Lundin is also the host of the famed New Orleans Investment Conference, the world’s oldest and most respected gold investment event. This year’s New Orleans Conference will feature Steve Forbes, Jim Rogers, Dr. Marc Faber and Dennis Gartman...plus dozens of today’s top gold and resource stock analysts...and a blockbuster debate between Doug Casey and Newt Gingrich. To learn more, visit www.neworleansconference.com.