Jun 24 2008 4:13PM

Astute Investors Will Enjoy Large Gains

The overall market, on the surface, is going sideways, a big improvement over the downward slide of earlier months. Very importantly, at least a few companies are now moving higher.

Nobody is going to ring a bell to tell you when the market has turned up. Some investors, those closest to the industry, are quietly accumulating the best companies. Many companies have been working away on high quality projects and will be reporting results over the coming weeks. Good news is being met with strong buying interest.

The metal prices remain volatile, especially so for gold and silver. Fundamentals have not changed: Demand for metals remains strong, in most cases continuing to grow, with severe constraints on new supplies.

Many investors remain concerned that the U.S. slowdown will bring down metal prices. To a certain extent, that is a self-fulfilling prophecy. The wholesale exodus of speculative investors from the base metal markets has impacted the prices in recent weeks. Speculative investors influence the metals markets in the short term, but fundamentals determine the long term trends.

One of the biggest misperceptions among investors, analysts and the media is the importance of the American economy to China and the rest of the world. Some commentators state that a slowdown in the U.S. will curtail growth in China and cause a global slowdown. The reality is that exports to the U.S. represented a mere 8% of the Chinese economy last year. A slowdown in the rate of growth of an 8% component of the economy will hardly impact the overall rate of growth in China, especially as Chinese exports to other regions continue to skyrocket. Growth remains strong through most of Asia and among the oil exporting nations.

Investors piled into the gold market earlier this year when it appeared that the American banking industry was on the verge of collapse. The government sponsored bail-out of Bear Sterns and the Federal Reserve reductions in interest rates and easy loans to the banks showed the extent to which the American government would go to prevent a collapse. That government largesse provides comfort in the short term, but over time will further erode the value of the American currency. In the meantime, the gold market is still absorbing the liquidation of those positions built up earlier this year.

While indexes or averages for the junior mining sector are showing that prices are more or less steady, a closer look provides a very different story. Some investors continue to sell their holdings. Individual investors are scared silly by the barrage of negative economic news. Many institutional investors are being forced to sell, driven by redemptions, cash shortages and fear. A large number of companies are seeing their share prices slide ever lower under the selling pressure.

For mining companies with strong management and good assets, shares offered for sale are finding ready buyers. In many cases, share prices are moving higher. Clearly, there are some knowledgeable investors who are using the current market conditions to advantage and are building positions in the better companies.

It may be some time yet – weeks or months – before a wholesale shift in investor sentiment results in an across-the-board lift in prices. Once popular sentiment has shifted, the better companies will already be trading at prices well above the current levels. As always, those investors who lead popular opinion stand to enjoy the largest gains.


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Kitco Contributed Commentaries 2006
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