Mining Profits from the Gold Bull

IF YOU ASKED PEOPLE TO LIST THEIR BEST INVESTMENTS since 2000, what percentage of them do you think would say gold or silver? Chances are, not many. Most would probably tell you about some technology stock that they happened to hold onto that has doubled or tripled in price from the bear market low in 2002.

In fact, not only would gold or silver probably not enter the conversation, chances are most people wouldn’t be able to name a single gold or silver mining company. That’s because even though gold has almost tripled and miners have risen over 600% since 2000, most people haven’t yet realized that precious metals have been outperforming the general market since then by leaps and bounds.

However, that may be about to change. The Fed’s decision to lower the fed funds rate by a larger than expected 50 basis points kicked the dollar index down to a record low. The euro traded over 1.40 per dollar for the first time, and the Canadian dollar reached parity against the U.S. dollar for the first time in over 30 years. These events reached the front page around the country.

This time, the dollar’s decline coincided with a sharp rise in public awareness about the weakening greenback. As a result, the precious metals bull market may be entering a new phase. When the general public becomes more aware of the dollar’s bleak future, more and more people will see charts comparing the price of gold and the U.S. dollar index and ask themselves why they haven’t been invested in gold:

Such a shift in public awareness is usually the ingredient that changes a stealth bull market — like the one we’ve seen so far in gold — into a raging bull market.

Every time people listen to the news, they are reminded of how stocks perform. They are reminded of interest rates and the bond market every time they get their credit card statement or check to see if it they should refinance their mortgage. They are reminded of the bull market in energy every time they fill up their gas tank. But unless they collect coins as a hobby, most people have very little regular contact with the price of gold. With the exception of a brief period at the peak in early 2006, the precious metals rally has garnered very little investor interest.

Since May 2006, fund flows out of precious metal stock funds have been huge, even though the price of gold remained near its peak. This suggests that even the investors who are aware of gold remain more interested in trading gold stocks than holding them for the long run.

All the sentiment signs suggest that we have a long way to go before gold is considered a must-have, long-term buy-and-hold investment. Such sentiment extremes are the stage at which all long-term bull markets end.

Technology stocks reached that pinnacle of sentiment in 1999-2000, and real estate reached that point in 2005-2006. The precious metals bull market may now just be at the dawn of its recognition by the public, which makes it unlikely gold is anywhere near an end to its bull trend.

The Amex Gold Miners Index consists of the 37 largest gold mining companies in the world. Over the past seven years, it has stair-stepped higher from a low at 180 in late 2000 to an intraday high at 1,266 in May 2006 — for a total gain of 603%. You can see the periodic consolidations outlined in black on the chart. Since May 2006, it has consolidated yet again, laying the groundwork for another sprint higher:

I have been keeping a sharp eye on miners ever since my paid service, The Survival Report, was launched in April. While I have anticipated a resumption of the long-term bullish trend, I’ve also been mindful that the correction from May 2006 was ongoing and could still produce more downside before it was completed. That downside came when the general market sold off in July and August and the miners were pulled down with it. The Amex Miners Index fell from a July high of 1,175 to an August low at 890 — a loss of 24% in one month.

However, that sharp loss in mining stocks was not accompanied by a decline in gold, and as soon as the general market stabilized, the miners quickly rebounded. The recovery was further aided by the Fed’s decision to lower the fed funds rate by 50 basis points, which led to a broad rally in miners and a breakout in gold above its May 2006 high.

The sharp sell-off in August appears to have been the washout that was needed to end the correction from May 2006, and the miners look to have now resumed their long-term uptrend. This means that mining stocks may just be the way to play this bull market.

Regards,
Mish

December 7, 2007