When will the mining stocks start outperforming again?

Good morning Bill,
In last night's Midas, Derek pointed out the pathetic performance of the gold and silver mining stocks over the last few years. Derek also wondered why this was occurring and what may change this condition. I would like to address that topic.

For the sake of discussion, let's assume every single gold and silver mining stock is managed or manipulated every single day. Let's also assume the primary reason for doing this is to help control the price of gold and silver. How many times have we seen some newsletter writer talk about the poor performance of the shares indicating that the "smart money" is getting out of gold leading to a price decline? How many traders have been conditioned to sell when they see the mining shares act poorly or make some counter-intuitive move?

As we know, the non-mining commercials Achilles heel is the physical market. The bankers can short all the futures and mining shares they want, but if someone or some country buys all the physical gold or physical silver, the game is over.

In James Turk's and John Rubino's 2004 book, "The Coming Collapse Of The Dollar", they talked about buying physical gold and the mining stocks. When I read recent commentary from James Turk, I see more of an emphasis on buying physical gold. The lackluster performance of the mining stocks seems to be pushing more and more newsletter writers and advisors towards the physical bullion.

Richard Russell's newsletter is one of the most popular and widely followed newsletter writers in the world. I have read many times where he has recommended physical gold. I have never seen him recommend a gold or silver mining stock.

One of the banker's or non-mining commercials worst nightmares has to be Jason Hommel. Jason Hommel use to own several silver mining stocks and recommended these stocks to thousands of subscribers. For whatever reason, apparently Jason sold all his silver stocks and no longer recommends silver stocks. He now deals in silver bullion and recommends that everyone buy silver bullion and take possession of the silver bullion.

There are probably plenty of other examples of newsletter writers, analysts, etc. switching from the mining stocks to bullion. This is exactly what the bankers do not want to see.

You will notice that China encourages it's citizens to buy physical gold and physical silver, not the mining stocks. China is not playing the paper game. In my opinion, China is gearing up with a long term approach to reintroduce gold and silver to be money again at some point in time.

The US mint just sold 3,592,500 1 oz silver eagles in January. This was the 2nd busiest month ever. The only other month with higher monthly sales was back in Dec. 1986 which was the first full month that the coins were offered to the public. This does not include all the 100 oz bars and the other forms of silver that were sold in January 2010. How many of Jason Hommel's subscribers and other investors just said, "screw the mining stocks, I am buying physical silver?"

All this buying of physical silver has caused silver to go into partial backwardation at the Comex on Wed. Feb 10. Feb. 2010 silver now trades at a slight premium to March 2010 silver. This is unusual for the partial backwardation to occur this early in the month especially since the March 2010 delivery month will be much more extensive than Feb. 2010.

It is now becoming counter-productive to manage the gold and silver mining stocks lower at the expense of investors buying more physical gold and physical silver. The constant counter-intuitive action of the mining stocks is leading investors to buy more and more bullion than they normally would have. When certain entities now drive the mining stocks lower, the resulting condition is a Pyrrhic victory.

I personally know several people who are predominantly interested in gold and silver bullion right now. Many are not interested in the mining stocks after watching many counter-intuitive moves over the last few months.

The price managers are at a crossroads. Do they:

1. continue to manage the mining stocks lower at the expense of increased demand for physical bullion? The increased demand for bullion will lead to higher gold and silver prices and possible shortages of physical silver. or

2. take some pressure off of physical demand by diverting investment capital to the mining shares?

I believe that it is in the price managers interest to divert capital to any paper product. The price managers would prefer that investors flock to the GLD ETF and the SLV ETF. There is nothing like selling the same ounce of silver several times over.

Over the next several months, I believe it is in the price managers financial interest to allow the mining stocks to sustain some type of decent rally to divert investors from buying physical bullion. I wouldn't be surprised if there was some sort of zig zag pattern up while the price managers attempt to cover shorts.
Paul