[Mining stocks got you down? Do you shake your fist at the sky whenever a $100 rally in gold causes nary a ripple in exploration shares? If so, get ready for a major mood change, because precious-metal stocks that have languished for years are about to blast off. That’s the prediction of our savvy friend Chuck Cohen, a NYC-based financial consultant who specializes in mining issues. He spells out the reasons for his strong optimism below. RA]
I am as frustrated as the rest of the gold true believers, because so many of us have focused on the smaller exploration shares. In fact, I guess by now that many of you have either pared down your holdings or even completely jettisoned these “losers.” I see several reasons or theories why they have behaved so poorly since 2005 in spite of gold’s spectacular rise. And because I believe in studying technicals visually, I am posting four charts from ancient history to help you get a longer-term perspective. I hope this proves both instructive and encouraging to you, because it has been very exasperating and even discouraging to many of us.
Theory number one: The stocks will never move because the gold cycle is almost cooked. At least, that is what so many quotable market experts have postulated.. Never mind that they have never put one penny in this sector — these gold mavens are as certain now as they were when gold was selling for $250. Instead, be safe, and buy bonds for that 3% certainty. I totally dismiss this theory, since there has probably never been a market that has been up 11 straight years and not had some kind of speculative climax.
‘Too Speculative!’
Theory number two: Junior mining shares will stay basically at these levels, as they are inherently speculative. These stocks will need the public to come in heavily, and they simply will never will do this. I refer back to point one for my response.
And now for theory number three — the real reason why the miners have remained comatose: They haven’t lifted off yet simply because they are not at that point in their price cycle. Remember, the stock market topped out in 1966 at nearly 1000 and couldn’t get through it until August 1982; then it never looked back. Who could have dreamed that at Dow 776, the venerable average would multiply almost 15 times within 18 years?
I believe that is exactly what we are seeing, at last, in the larger miners: a massive breakout. On Monday, we had new highs in Newmont, Royal Gold and Randgold, with Goldcorp and Barrick trading close to their all-time highs. This is quality leadership, led by the largest mining companies and being fueled by the largest investors. Soon this move will spill over to the smaller miners, as the larger miners begin to buy cheap ounces by taking over the next tier of miners. Look for takeover mania to hit the group.
But more significantly is that when you look at a cycle like this, you must refer back to the last parabolic cycle — i.e., the stock market of the late 1980s and 1990s. Although the initial leadership came from the Dow stocks, which could be viewed as equivalent to today’s Gold Bugs Index (HUI) shares, when the Nasdaq finally sprang to life in the mid-1990s, its component stocks flew, driven by fund managers and a public certain the tech bubble would never burst and that retirement at 30 was totally doable. Remember that?
Frantic Search for Ounces
I expect to see the same shift in the gold mining shares, and probably very soon. The game, as the bull market in gold explodes into its accelerated parabolic pattern, will gravitate towards the smaller shares as the problem changes from obliviousness toward these companies to a frantic search for whoever has got the ounces. We are entering into an historic period of physical shortage of gold and silver, not just because of the total debasement of currencies but because of the crooked shenanigans that have gone on for more than a decade. There has been an immense amount of physical gold that has been sold but which does not exist. Imagine you have a company such as Mauodure, which might have 10 million ounces with a current market cap of under $250 million. But 10 million ounces at $2,500 gold comes out to $25 billion of gold, or one hundred times the current price.
Of course, this isn’t what it is worth, but it does provide an idea what is coming. In a world of paper-currency pollution, the miners will be virtual mints. The trick is to recognize this, pick out the best plays, and then be patient. The first shift of wealth has been taking place in the world, from the decline of the Western nations to the East. A second one is on upon the immediate horizon — the transfer of wealth, from those who under the onerous burden of debt attached to assets to those who are unencumbered by debt and who had the foresight and patience to hold onto gold and silver.
Expect a Mania
History has revealed that a generational bull market such as what we saw from 1982 until 2000 does end not with a whimper and a lack of public interest. It will end in the greatest mania ever seen. As an aside, the terrible performance of the speculative shares is perhaps the single most important technical indication that we are still very early in this phase. A skyrocketing gold price is not a healthy sign, since gold is a financial barometer, just as a high reading on a thermometer alerts us that something is wrong with our body. But that is for another day, and you will have to get out your bibles.
The point to notice is that the Nasdaq lagged the Dow until 1995 and then took off as the public finally realized that it was safe to buy stocks and chase the parabolic curve until the painful conclusion.
Incidentally, I will soon be offering a different kind of investment service. If you’d like further information, or if you’d like to discuss your current portfolio, you can contact me by clicking here.
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One thing speculators in the junior mining shares might like to look at is comparing the price trend since Dec. 2008 with the price trend in TLT.
Rumour had it that hedge funds were long gold and short the miners, but I would say they were probably selling the miners and parrying the rising price trend in TLT.