It is impossible to extrapolate anything from a single data point, however careful observation usually pays dividends especially when looking for certain clues that financial markets may signal. Today, Thursday June 5, 2008 I noticed that gold was down on the day and yet gold stocks were up. Silver actually had a rather positive day overall and many silver equities were up two to three percent on the day. Normally, when gold is off even slightly and gold stocks show mild strength it is a result of short covering. In fact this is most likely the cause of today’s price action.
Many in the precious metals investment arena have bemoaned the fact that the metals have performed better than the mining stocks and far better than the junior mining companies.
In the May edition of The Morgan Report I wrote: “Earning season is here and many of the producers have reported very good margins, far superior to what they reported last year during the first quarter. The market is taking a big yawn at this excellent news and we need to comment. It is only a matter of time before Wall Street wakes up to the fact the many of the leading gold and silver companies (like those we feature each month in the top asset allocation model) are making profits. Earnings drive stock prices eventually, so the point is simply that these earnings will not be ignored forever.
For example, Silver Wheaton Corp. (TSX, NYSE:SLW) announced record net earnings of US$27.9 million (US$0.13 per share) and operating cash flows of US$33.1 million (US$0.15 per share) for the first quarter of 2008. Newmont and others had excellent earnings. As I stated in August of 2007 when the credit crisis surfaced in the financial markets, some companies have hit their (intermediate) bottom and now is the time to buy. At the time I honestly thought that some of the better juniors had probably hit bottom as well. During this month’s review it appears that mainly the top tier companies bottomed in August. It is very difficult to find any junior resource stock that is not close to or below the August 2007 low.
Last month we focused on the probability of the current corrective phase in the precious metals. Some are still of the opinion that the correction is almost over and we can expect to see silver and gold move toward their recent highs in short order. We do not see that taking place and expect at least a three to six month corrective phase to develop. This is the time to build or accumulate stocks you favor.
One of the clearest signs that the bottom is complete will be the precious metal mining equities refusing to move down further in spite of the fact the metals themselves may continue to find lower prices. In other words, I fully expect to see the mining stocks form a bottom before the metals themselves. If we are wrong and this sell-off is short-lived, we will send an alert to our readers. The problem will be filtering out a quick move to the upside that might last for a very brief time. We will employ the rules and discipline that have served us so well in the market so far.”
So, today could be the day and then again it may not be. The point however, is to use the traditional summer weakness in the precious metals complex to your best advantage because the months and years ahead are going to prove to be a time when great fortunes are won and lost based upon investing in what the market values and what is does not value.
We are still climbing the wall of worry and many that have put their investment toe in the water of precious metals found the temperature uninviting and have left the pool. There is plenty of “reasons” to get out because many of the most notable in the industry are calling this a commodity bubble.
To my analysis it is not a bubble but verification that most investors are still skeptical of gold and silver. Still worried about the overall financial landscape but do not have any real conviction to their investment strategy. They simply want to play it “safe” and therefore stick with the general stock market and avoid the commodity sector. This will change, and I expect far more interest in the gold market once the metal of kings moves over the $1000 USD level.
As an interesting aside I will also go out on a limb and forecast that more gold will be purchased between $1000 and $1500 than was purchased between $500 and $1000. Investors do not buy low and sell high, most wait until things are well underway and then gain the confidence to invest accordingly.
Want verification? Simply look at the tech wreck or technology bubble, most jumped on the Nasdaq after it hit 8000 on the way up. As far as I am concerned it will be similar for the precious metals, most investors will find gold and silver irresistible during the optimism phase, and during the final euphoric phase (mania) most everyone will be screaming it is different this time.
Remember, the more things change the more they remain the same.
Mr. Morgan has followed the silver market daily for over thirty years. Much of this Web site, www.silver-investor.com, is devoted to education about the precious metals.