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
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
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.