Gold bugs finally have some reason to rejoice, after a long and painful two years. Precious metals are breaking out in powerful fashion, with gold up $200 or 16% and silver up $5.50 or 30% since bottoming on June 26th. These explosive moves have been generated with a series of higher highs and higher lows, suggesting that we have seen the bottom of the prolonged correction. After a restful slumber, the gold bull appears to be fully energized and off to the races once again.
It is interesting to note that gold and silver have broken their inverse relationship with the U.S. dollar and are generating these huge gains despite a rising dollar. They are also moving higher in lockstep with the overall stock market, rather than acting as a risk-off trade. If the FED does not taper as expected in September, we are likely to see the dollar drop sharply and an acceleration of the recent gains in precious metals. While most analysts are forecasting tapering next month, I do not expect any significant tapering in 2013 and believe market participants have incorrectly priced this assumption into commodity prices. In my view the he dual mandates of the FED would dictate a continuation or even increase in QE, not tapering. If Wall Street's central-planner-in-chief announces no tapering or only token tapering next month, look for a revaluation of gold and silver prices much higher.
While the recent moves in precious metals have been impressive, those investing in mining stocks have enjoyed leveraged gains to the moves of the underlying metals. While gold is up roughly 16% in the past two months, the Market Vectors Gold Miners ETF (GDX) is up 27% and the Junior Gold Miners ETF (GDXJ) is up a whopping 45%!
Similarly, while silver has advanced 30%, the Global X Silver Miners ETF (SIL) is up 43%. Most investors would be ecstatic to realize these types of gains in a year, yet mining stocks have generated them in just two months. This return to leveraged gains for mining stocks is a bullish sign for investors, but the HUI-Gold index is still showing that mining stocks remain severely undervalued relative to the metals.
Precious metals investors that have stuck through the correction are finally seeing their patience rewarded and those with the courage to buy the dip have experienced significant gains the past few months. If you are still on the sidelines, gun-shy, don't despair. I believe the rebound in precious metals is just getting started and a return to previous highs is likely to result in a doubling or better for many mining stocks. If you would like to see which stocks we believe will outpace their peers during this next upleg, click here to become a premium member and gain instant access to our model portfolio, watch list and contrarian newsletter.
While the correction in precious metals over the past year has been painful, these types of moves are a necessary part of any long-term bull market. I believe we are likely to see John William's inflation-adjusted highs of $8,890 gold and $517 silver before all is said and done. In other words, the fireworks are just getting started and this may be your last chance to take advantage of deeply discounted prices. If I am correct about gold and silver returning to previous highs in the coming months, those that bought anywhere near current levels are going to realize considerable gains.
Jason Hamlin
Gold Stock Bull
