July 12, 2006

“Digestion”

Like the proverbial pig in a python, it will take some time for the gold market to digest the massive correction that it was choking on just a few weeks ago.

The good news is that we’re closer to the tail end of the process, and the aftereffects will soon be behind us.

Physical demand has begun to pick up once again, as old geopolitical worries take turns dominating the headlines, and new ones have emerged. Just as the market was growing tired of the Korean fireworks show, for example, the nuclear standoff with Iran resurfaced, and the bombings in India supplied a new source of global tension.

Longer term, I expect a surprising level of demand from mid-tier central banks seeking alternatives to the U.S. dollar and the Euro in their reserves. Gold’s recent strength in both dollar and Euro terms, even as the dollar has gained ground against other paper currencies, speaks to an underlying strength in gold that should soundly support the long-term uptrend.

Of more immediate interest, recent trading patterns in the metals and mining stocks have served to illustrate the differences between these two markets.

Earlier this month, demand for gold was unabated in most of the world, while the mining stock markets were largely on vacation. In addition, there have been some lingering margin-call effects in the equities, resulting in downward price pressure whenever buy-side demand slacks off.

Add in a summer season in full swing, and it’s not surprising that the mining stocks have typically been relatively week, even on days that gold has performed quite well.

With all that said, the rebound in gold and mining stocks over the past few weeks has been quite impressive. It is very possible that the correction is now fully behind us, although another dip downward would not surprise me.

In short, hang in there, and continue to pick up irresistible bargains when they develop. But do so carefully, since trading volumes will remain paper-thin for some time, and it won’t take much buying attention to drive prices of most issues quickly higher.

By the end of this month, or by mid-August, I expect gold and the mining indices to have established solid upward trends, in preparation for the hordes of interested buyers who will return in September.

Those who buy now, and do so with an easy hand, will reap the greatest rewards.

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.