Precious Signs
Posted: Thursday, August 26, 2010
by David Morgan
Stone Investment Group
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. Recently, 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 of the producing mining companies have reported very good margins, far superior to what they reported last year. The market is taking a big yawn at this excellent news and I 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.
As I stated in September of 2008 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. However, I was wrong and off by about two months, certainly those that paid attention to my calling a top in the market at $21 silver and took profits were happy.
My call for a bottom was not as exact as my call for the top but helpful for a long term investor or even a trader with an iron stomach. I did hedge my call by stating This is the time to build or accumulate stocks you favor. So, at the time I was not absolutely certain the bottom had formed completely.
The point to think about now, 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 "gold" 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 $1250 USD level.
As an interesting aside I will also go out on a limb and forecast that more gold will be purchased between $1250 and $1500 than was purchased between $500 and $1250. 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.
David Morgan
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.
This Article has been viewed 170 times. (Not updated in real-time.)
Top-level comments on this article: (1 total)Your opening sentence is very wise. We can't judge anything from the snapshot.
We want your comments! If you can read this, you don't have javascript enabled, so you can't use this comment system. Please enable javascript.