A Minor Correction

By Tom Dyson

Gold mining stocks have had a rotten time of it lately.

Since topping out at 257 in January 2004, the HUI index of
unhedged gold miners has skidded 30%. Even more frustrating
for the rattled resource investor, over the same time period,
gold has actually RISEN (about $2 an ounce to $426)
and so has the general stock market!

If there’s a logical explanation for this, we don’t know it.
Besides, we’re only concerned with where these stocks go
next. That’s where Doug Casey and Steven Jon Kaplan come
in. They’re both seasoned investors in the resource arena
and they both think gold stocks are going up. The rest of
today’s issue explains why…

Doug Casey has been an active investor in natural resource
stock for the past 25 years, plenty of time to have
witnessed all manner of cycles and market action. He says
in his latest issue, "As is to be expected, in the early
years especially, I made mistakes, most attributable to
the hubris of youth. But most humans (politicians and
economists being the exception) learn from their mistakes,
and I learned from mine. As a direct consequence, I have
made considerable money in the resource sector. Certainly
enough to retire and hang out in upscale locales for the
rest of my life, if that were my wont."

Doug says secular bull markets come in three phases: 1)
Stealth, 2) Wall of Worry, and 3) Mania


It’s called the ‘stealth’ phase because ‘it’s there but no
one knows it.’ Nobody wants to own these stocks because
they’ve been beaten up so badly, and shares can be bought
on the basis of value alone. It’s now that the new bull
market is born. Word gets around, and a wave of new
investors is brought into the market. In the case of mining
stocks, the stealth phase ended in late 2003.

Wall of Worry

Seeing momentum diminish, speculators start realizing
profits and drive share prices back down. A dark cloud is
cast over the psychology of most investors and people start
to fret about all sorts of things. This is where we are

"Despite all the fear and sharp sell-offs, the market
slowly climbs the ‘Wall of Worry.’ It eventually digests
selling from the profit takers and the timid as new buyers
overwhelm them."


The broad base of individual and institutional investors
become convinced the market is going to the moon, pile in,
and drive it half way there.

"I expect the mania stage to resemble what we saw with
Internet stocks in the late ’90s," it says in the current
issue of Doug’s newsletter, International Speculator.

So what makes Doug Casey so sure this is actually a major
secular bull market for resource stocks?

"There are lots of arguments, but in brief, we’re coming
off the longest and deepest secular commodity bear market
since the depression of the ’30s," he writes. "Commodity
prices are still far closer to historic lows than historic
highs, at least in constant dollars, which is what counts."

"The world economy is evolving away from the debt-burdened
U.S. and towards China, India, and numerous smaller
countries; their growth will be volatile, but it’s for
real, and they will consume unbelievable amounts of raw
materials in the coming years."

"There’s been very little mineral exploration for a full
generation, the industry has come nowhere near replacing
reserves, and a historic supply crunch in many commodities
is in the making."

Should you be buying now? Doug Casey’s answer is: Yes!

Our second ‘seasoned investor’ is Steven Jon Kaplan, author
of a free website called the True Contrarian
[www.truecontrarian.com], and student of the precious metal
markets since the 1970s.

"The key to knowing good buying and selling opportunities
in gold mining shares is to track the spread between the
price of spot gold and HUI, the Amex Gold Bugs Index," he
told us on the telephone yesterday afternoon.

The spread Steven is referring to is calculated by
subtracting HUI from the spot gold price. As a general
rule, a high spread indicates pessimism toward gold mining
shares, so you want to buy these stocks when the spread is
starting to reverse lower from a major high point.

As the nearby chart shows, this past Friday, April 29,
2005, the spread reached 257, an all-time record high. The
record low was 148 on December 2, 2003, when HUI was at

"It acts like an inchworm that can’t creep any deeper into
its crack. When it changes direction, it doesn’t stop for a
while," says Steven. He’s noticed strange behavior in the
gold markets over the last couple of days that makes him
think the turning point is finally at hand. For instance,
yesterday, gold fell $3 an ounce, but the HUI rallied
1.65%. And the HUI has started lower in the last few
trading sessions only to close higher each time.

"If this spread continues to reverse and move lower, as is
most likely, it could reach 225 or less within a couple of
months. Keep in mind that even if gold plunges to $396,
which is possible given its bearish traders’ commitments, a
spread of 210 would put the HUI at 186, almost 6% above its
current level."

We asked Steven where investors should put their money to

"I like those stocks that got beaten up the worst having
risen the most beforehand. I’m watching the mid-size
producers more than the big boys…stocks like Hecla
Mining, down from $9.31 a share at the beginning of 2004 to
$4.55 on Monday. Or Coeur D’Alene, which has fallen more
than 60% from its 2004 high. I also like GSS, GLG, and

Finally, even Bill Bonner has noticed this disparity. He
wrote in yesterday’s edition of the Daily Reckoning: "The
ratio of gold, to gold mining stock prices is unusually
high. We assume it is mean reverting, like everything else
on the planet. Either the price of gold will fall, or the
price of gold mining stocks will go up. Our guess – for
what it’s worth – is that the mining stocks will move up."

Need we say more?

Did You Notice…?
By Dennis Gartman

The railroads here in the U.S. haul the nation’s freight.
Actually, between the railroads, the truckers and the
shipping business, the nation’s production is moved from
place to place.

We can make a very reasonable assumption regarding the U.S.
economy by looking at railroad traffic records: if the
latter are high and rising then the former almost certainly
shall be too; and if the latter is low and falling, then so
too the former.

Thus, when we read that the Association of American
Railroads reports that in the most recent week in review
the nation set a new record for railroad traffic, it is
reasonable to expect that the economy is going well
generally. The AAR reported that the nation’s railroads
carried 33.3 million ton-miles of cargo during the week
ending April 16th, eclipsing the previous record set in
November of last year when the nation’s Christmas goods
were being moved.

Further, the AAR reports that for the first 15 weeks of the
year 7.4% more units of trailers and containers were hauled
by the railroads than were moved a year earlier.

Cargo is (or was) on the move; business was being done…
and taxes were being paid. It all fits together nicely.

And the Markets…



This week

















10-year Treasury





30-year Treasury





Russell 2000


























JPY 104.98

JPY 105.04



Dollar (USD/EUR)





Dollar (USD/GBP)





The Daily Reckoning