[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.
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