Gold Stock Bull

There are some great articles comparing gold versus silver as investments. One of the best is Adam Hamilton’s recent article entitled Silver Lagging Gold.

“So much becomes clear when silver is considered from a speculator’s perspective. Early on in gold uplegs, greed is low and speculators are skeptical that the gold upleg is for real. Without much greed or excitement, they aren’t interested in silver. But the longer that gold powers higher, the more speculators start to think the upleg is real and sustainable. So gradually at first they start buying silver. By the second half of the gold upleg the small silver market really explodes on the flood of bids and greed ultimately fuels a parabola. But once all the speculators are in, profit-taking selling overwhelms bids and silver collapses.”

Silver broke resistance today and powered through the $15 mark. At the time of this writing, silver is trading at $15.75 in Hong Kong, with the trend line pointing straight up. Gold is also parabolic in early HK trade, adding $7 in the last ten minutes! Good times for precious metals investors, especially those who kept positions instead of selling when several “experts” were calling gold overbought around $760. Back on October 23rd, our technical analysis concluded that the upleg had plenty of room left to run and we wrote:

“as quick and steep as the latest run in gold has been, there is no indication that a correction is coming. A short consolidation might ensue, but if history is any indication, this upleg will take gold to $850 and then towards $1,000 in the coming months. The upside potential significantly outweighs the downside risk at this moment. Those trying to time the market might want to wait for gold to dip back to the $730’s, but they risk missing out on a run towards $850. Our strategy will be to maintain our core positions and look to add on a breakout above $790 or dip to $730.”

We maintained those core positions and have been rewarded handsomely. We also added to our positions as gold confirmed the breakout above $790. Hope you have been along for the ride!

But getting back to the gold vs. silver debate, Mr. Hamilton’s article left me with the impression that silver has been lagging gold. This may be true over the long-term, but looking at the performance of each metal since the breakout in mid-August, we can see that silver has outperformed during 2 of the 3 months and overall is up 34%, while gold is up 26%. That 8-point difference is worth your attention. Where is the lag?

And not only has silver outperformed gold over this recent 3-month upleg, but the outperformance appears to be accelerating. During September, silver’s performance beat gold by just 1 point. During October, gold outperformed. But during the first week of November, silver is up nearly twice as much as gold (9.7% vs. 5.1%). We expect silver to continue outperforming gold throughout the remainder of this upleg and throughout the remainder of the bull market. Our favorite silver play is Silver Wheaton, a company we have covered in detail here. But another silver stock that has lagged in the recent upleg and looks undervalued at the moment is Coeur d’Alene Mines (CDE). The stock was up 13.5% today, but it still has some catching up to do.

Speaking of which, we view silver’s recent awakening as a sign that the current upleg is tiring and is well past the halfway point. Having lasted approximately 10 weeks thus far, we are anticipating another 2-3 weeks of strong upward price movement before any correction/consolidation begins. We have calculated a price target of $865 for gold and $17.50 for silver before the market takes a significant breather. Sound overly optimistic? Well, gold just added another $3 to reach $830 since I started the last paragraph. The trend is your friend.

In conclusion, silver has outperformed gold during the latest upleg and can be expected to outperform gold during the overall bull market in commodities. Silver stocks should be a part of the portfolio of any serious precious metals investor. However, as Mr. Hamilton pointed out in his article, silver is much more volatile than gold and as fast and furious as it may shoot past gold, it has a history of coming crashing back down just as fast. You have to be ready to cash out and leave less savvy investors, late to the show as always, holding the bag.

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We were a bit early to say that the Gold Selloff Would Not Last. After pausing at 340, the HUI continued all the way down to support at 300. But 300 proved to be very solid support and the Gold Bugs Index bounced off this mark and charged all the way to a new record at 387. That is a gain of nearly 30% in just a month! More importantly, the HUI has broken through resistance at 370, which has turned back the HUI on five separate attempts over what has been a lackluster year of consolidation in the gold market.

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We have profiled two new companies so far in 2007 that we felt represented exceptional value and were set to post impressive gains. Despite the failure of gold to break resistance at $700, we wanted to take a minute to review the performance of our stock picks.

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