Tuesday, March 17, 2009

Getting closer to showtime

I patiently await the final gold stock rally into the spring, which has not yet begun. Many people think gold miners are going to get crushed when the stock market finally makes its spring recovery, but nothing could be further from the truth. One need only look at the 2000-2003 general stock market bear to see how things are going to play out in the gold mining sector.

This is my road map, which is always adjusted as Mr. Market provides more data, on how the rest of this spring will play out for gold stocks:

Why would I think this is what's going to happen? Three reasons:

1) History and seasonals - gold stocks generally top out in the March to May time frame during a bull run that starts in the fall. We didn't get the typical frenetic top of a gold bull leg up, so it should still be ahead.

2) Fundamentals - couldn't be stronger. People who think you need inflation for gold mining stocks to rise have bought the line sold to the sheeple. You need expanding profit margins, just like with any stock in any industry, to attract the big money. Gold miners make beaucoup dollars during significant deflation, as costs go down while gold (being a currency) does well like many strong currencies. Forget the decade of the 1970s, which is down the road. Think 1930s, when gold stocks absolutely crushed general stocks and made huge gains.

3) The general stock market indices should be bottoming in the next month and gold stocks will bottom before general stocks (just like this fall), so the timing of a bottom in the gold miners in 1-2 weeks makes sense. When the general stock bear market rally finally gets going, it will carry the gold stock bull higher with it.

Here's an example from the beginning of the gold stock bull market in 2000-2001, when the current secular (i.e. measured in decades) gold and gold stock bull market began:

In the next week or two, things may seem scary for a few days, as gold stock plunges can be quick and ruthless. But this is the time to buy, not fear. Having said these things, this coming leg up will be the last before a longer term correction that may well last until the fall. The coming bull run up will be fast and over in 2 months or less and then a wicked correction will likely occur so traders need to be nimble and take profits appropriately. Keep in mind that I expect this leg of the bull market to gain 130-170% from this past fall's low, which is a lot for any sector in these market conditions.

For me, I hold physical gold as a core and trade the miners, so I will be exiting the gold mining sector in the April-May time frame for a while. The one exception is RGLD (Royal Gold), a gold royalty company, which I may or may not hold longer given its past tendency to ignore the seasonals (and the gold mining sector and stock market in general) at times.

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