February 23 2007

The Quiet Bull

One of the most surprising things about the market in the past month was the amount of hand wringing about gold and silver prices.   Even long term supporters of the metal seemed to take a lackluster view of the latest advance. Everyone appeared to be waiting for the other shoe to drop.  In this case, the “other shoe” was almost universally expected to be a calamitous price drop.

We found this view surprising.   We like to think we take a fairly “neutral” stance on metals, including gold.   That’s not to say we aren’t bullish.  Quite the contrary.  We were very early in the game when it came to calling this secular bull and our view that we are still in the early (perhaps middle) innings of a long game hasn’t changed.   Even so, we like to be level headed about the market and trade against it where possible.  We’ve made the comment often enough to subscribers that “ALL stocks are trading stocks” and that one should happily take any gifts the market offers them.  Selling into highs and buying into lows to bring down the average holding cost of your shares is never a bad idea.

With these thoughts in mind, we were expecting to see a lot more accumulation of gold and silver stocks than has taken place recently.  The fact that uranium is hotter than hot and base metals were scaring those who misunderstand the sector would have cooled things, but it was still an unusually mild gold stock market. 

While the popular gold share indices were creeping upwards, the yellow metal itself was passing through some highly significant milestones.  In mid January, it passed upwards through the downtrend line marked by the May and December 2006 highs.  By the end of January gold had convincingly exceeded the December high and in the past couple of days it’s breached the secondary high visited last July.  

We’ll see if the current high holds but we think the levels reached by the gold price on February 21 definitively mark a new bullish advance. The only obvious area of upside resistance on the chart in the view of your (admittedly non-chartist) editors is the multi-year high of $730 itself.  You’d never know that from most gold stock prices however.  The most popular indices remain a few percent below the highs they reached at the start of December, even though gold itself is several percent higher.  There seems to be a lack of belief in the rally so far and there was little or no comment on it in the popular press until yesterday’s $22 advance shook things up.

Should we take this as a negative sign?   We don’t think so.  From the start of the current gold bull market we’ve been happy to see the yellow metal keep its name out of the paper.  We realize that this is frustrating for gold bugs and traders who want to see everything happen right away.  Nice as that might be in theory, anyone who went through the tech bubble should be wary of parabolic charts.  We certainly are.  We expect this cycle to be longer and stronger and a measured advance is more likely to accomplish that.  At some point, things will get really crazy, the great unwashed will back up the truck and everything will go through the roof.   That market isn’t here yet and we don’t think it will be for some time.  We do think this is a market you can make money in however and our readers are.  Gold share always catch up with the gold price eventually and, in fact, usually run slightly ahead of it.  That means the current gap between gold prices and gold stock indices is likely to be filled by gold stock prices moving higher.  In short; it’s a money making opportunity.

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David Coffin and Eric Coffin are the editors of the HRA Journal, HRA Dispatch and HRA Special Delivery publications focused on metals exploration, development and production stocks. They were among the first to draw attention to the current commodities super cycle and have generated one of the best track records in the business thanks to decades of experience and contacts throughout the industry that help them get the story to their readers first. Please visit their website at www.hardrockanalyst.com for more information.

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