WHY THE GOLD & SILVER STOCK BUBBLE PHASE LIES AHEAD OF US...

originally published April 1st, 2011

The purpose of this article is to totally discredit the notion being spread about on some public websites that gold and silver are "in a bubble". As we will demonstrate, nothing could be further from the truth - on the contrary, the bubble phase in this market lies ahead of us - ALL OF IT.

We`ll start by looking at the long-term chart for gold, which as it dates back to 1999, shows the gold bullmarket in its entirety. What this chart shows is steady, orderly uptrend, with the only hiccup being that caused by the 2008 market meltdown, when gold fared a lot better than most investments. Since 2008 gold's progress has in fact been quite modest given the abuse heaped upon the dollar and other fiat from that time. If gold was in a bubble it would have accelerated away to the upside into a vertical spike, which it clearly has not done - so it's a case of so far so good - no bubble - yet.

Now we turn to a chart for gold stocks, the HUI index, to see how that has performed during the same period from the start of the bullmarket. On this chart we see that after a period of strong outperformance that lasted just 3 years, from late 2000 to late 2003, gold stocks have put in a decidedly pedestrian performance, which is kind of interesting when you stop to think that they are supposed to greatly outperform gold during a bullmarket. If this sector were in a bubble the public would have been piling into gold stocks which would have gone nuts to the upside, which clearly has not happened. The conclusions from this are therefore obvious - the sector has not been in and is not in a bubble, and as it is very likely, like most bull markets, to end with a bubble phase, that phase lies ahead of us - ALL OF IT. We can of course speculate as to the reasons for the underperformance of PM stocks, which include increased energy costs for mines, fears of stocks dilution (often justified), and fears of the impact of another 2008 style meltdown (not justified because PM stocks are often contra-cyclical and hedge funds are now short these stocks instead of long as in 2008), but at the end of the day if gold and silver keep steaming higher as looks probable, especially longer-term, then the profit margins of mining companies are going to rise more and more, and at some point the markets are going to grasp this reality, and when that happens we are likely to see a powerful uptrend develop as mining stocks go into catch up mode.

The underperformance of gold stocks relative to bullion since late 2003 is made starkly obvious by the chart for the HUI index over gold for the same timeframe. This chart exposes the dismal underperformance of gold stocks relative to gold since 2003 - some bubble!!

There is unlikely to be another 2008 style meltdown because politicians worldwide are committed to following the lead of the US and inflating their way out of trouble. They are much less likely to be booted out of office if they impoverish the population slowly via inflation rather than at a stroke to quote ex British Prime Minister Edward Heath via a deflationary implosion, so they are fighting tooth and nail to beat back the forces of deflation and recession by continually ramping up the money supply and monetizing their debts etc. Even if the markets wrest control from them by means of sharply rising interest rates and a collapse ensues, gold is going to come off best and PM stocks should not suffer the same kind of declines they saw in 2008 because the trigger happy hedge funds don't have any to sell.

We can fairly conclude then that the bubble phase for gold and silver, and therefore for gold and silver stocks, lies ahead of us, and since stocks are now way undervalued relative to both gold and silver, they are likely at some point to go into a catch up phase that will probably involve a steep uptrend such as we saw between 2000 and 2003. A key point to make before we close is that the best gold and silver stocks that are most likely to partake in such a rally, and the safest, will be those that are either in production (significant production), or are within a year or so of going into production, an example being our Scorpio Mining (SPM) which is now doing very well. If you know any such stocks (which I could have overlooked), let me know at once and we will look at them.

Posted at 11.15 am EDT on 1st April 11.