Markers For PM Sector Resurgence In Place

by: Emmet Kodesh

Signs are accumulating that resurgence in the PM (precious metals) sector has begun and that a two-year cyclical correction has ended. Depressed values, increasing demand, declining bullion stocks, negative sentiment, loose fiscal policy and likely changes in monetary structures all support resumption of the secular rise in PMs and in the miners that are like leveraged plays on them.

While gold and silver bullion have risen steadily from their June lows (c. $18.20/oz silver, $1150/oz. gold), most miners have been gaining or, as on July 11 and 16, surging. Companies I often have mentioned or profiled like mid-tiers First Majestic Silver (NYSE:AG) and Eldorado Gold (NYSE:EGO) rose 5.68% and 7.09% respectively July 16. Streaming Company Silver Wheaton (SLW), one of the most profitable companies in the markets, rose 4.52%. The advance in PMs was broad and on average volume. Large caps Goldcorp (NYSE:GG) and revenue giant Barrick Gold (NYSE:ABX), plagued the past two years by project delays, impairment charges and special attention from special interest groups rose 5.47% and 6.41% respectively. Those who follow my writings know that I consider ABX, despite reversals, a great value at its current level and on schedule to address issues at its mammoth site, Pascua Lama straddling the border of northern Chile and Argentina.

I wish to mention notable signals from July 16 volume and relative performance before discussing the gold and silver price chart that is the icing on the cake for this positive outlook. As for the signals on the big day for PMs, the well-known Spider Gold ETF (NYSEARCA:GLD) and iShares Silver (NYSEARCA:SLV) traded July 16 at half their usual volume and, during trading hours, again underperformed the Sprott ETPs for gold (NYSEARCA:PHYS) and silver (NYSEARCA:PSLV) that are 100% backed by physical metal. The divergence is slight but has become regular in recent weeks which may reflect a substantial reduction in COMEX gold stocks as shares are redeemed to satisfy commercial and retail buying.

The main focus for this article is a look at ratios between the peaks and troughs during the 12-year PM Bull market that began in 2001. Silver ran from $4.65/oz. to $8.01 in February 2004, nearly doubling in price. After correcting and basing to 3Q 2005, silver ran to $21.01 in February 2008, tripling off its new base. The trough at $10.80/oz. in November 2008 was followed by a strong, sustained 30-month rise to $49.08 in April 2011, quadrupling the previous low. The current 25-month silver correction went to $18.06 last month: it closed July 16 at $19.97. Here is the macrotrends interactive chart where you can find the progress of silver and a similar trajectory in gold prices.

While the 11% recovery of recent weeks is welcome to investors and reassuring to those who prefer coherent behavior in any market and sector, there are more reasons to believe we are seeing the long-building resumption of the secular bull in precious metals. Consider first the lesson of the chart about the structure of the bull: the initial rise to February 2004 saw silver nearly double in price. The next trough-peak in February 2008 was a tripling in price. The 30-month rise from the November 2008 trough quadrupled the price of silver. I would not rest on price history alone ("past performance is no guarantee of future results") but the 25-month, 63% retracement appears to have ended last month. In the twelve years of rising PM prices, industrial and hi-tech uses for silver have increased enormously, a pending renewal of gold's role as a backstop to protracted and dangerous CB (central bank) experiments in fiat management of economies and the increasing appeal of both precious metals to retail investors east and west suggests that the trajectory of higher highs will occur. Fiscal and monetary policies and commerce support the inference from the chart that in the next 2-4 years silver could quintuple or more from its recent trough to $90 (in current dollars).

The miners who produce the metal are a leveraged play on demand. Having been squashed to prices that reflect extreme disgust and disinterest the miners are uncoiling like compressed springs. Thus we saw that mid-tier producers with abundant reserves like Kinross Gold (NYSE:KGC) and IamGold (NYSE:IAG) whose trouble with negative revenue growth or negative net income and cash flow have crushed share prices on July 16 rebounded 6.68% and 7.59% respectively, moving well away from their 52-week lows. Similarly, the Junior Gold Miners ETF (NYSEARCA:GDXJ) and Silver Miners ETF (NYSEARCA:SIL) also had another strong day, up 4.15% and 4.29% respectively and are 20% above their cyclical lows.

As for commerce, that is, matters of supply and demand, COMEX, Brinks and the Shanghai Gold and Silver Exchange all have depleted warehouses as buying by Asian CBs and retail investors from Hoboken to Hong Kong continues to set records. China's CB is buying at a pace to buy 2000 tons of gold, double its purchases last year. This is favored by policies in the West and welcomed in the East. This long term trend reflects goals for governance and socio-economic management that are complemented by the increasing number of ex-USD bilateral trade agreements involving China and by the expansion of joint credit-currency facilities between China, Australia, Canada, Germany, Britain and more nations with each passing season. Clearly gold will have a major role in supporting direct business transactions and exchange with RMB (renminbi, "people's currency"). So patterns of supply and demand and changing fiscal and monetary practices join with price history in making a constructive outlook for gold.

Part of the steady rise in bullion prices the past three weeks and the concomitant jump in the miners (with the latter boosted further by tempting valuations) are the massive net long positions banks have taken in gold. As I suggested recently, action in the PM sector has taught us that volatility is the norm and sudden downdrafts can come seemingly out of the blue and in defiance of fundamentals. However, there are abundant reasons to believe PMs have begun a strong run to new highs in real, adjusted for inflation terms.

At today's values it is difficult to go badly wrong in the PM sector. GG, SLW, AG and EGO remain best in my view in the large-cap, streaming and mid-tier gold and silver spaces. KGC and IAG still have challenges, noted above, but at current prices have appeal including for traders with a 4-15 month time frame. As I have sought to explain (please see my archive), Barrick Gold remains a strong value and dividend pick with negatives priced-in (and then some) and the likelihood of big gains as PM prices rise and work at Pascua Lama proceeds toward production in 2016. For those who want broad coverage in the sector, SIL and GDXJ still are cheap relative to outlook and McEwen Mining (NYSE:MUX) is an ably run debt-free junior with two properties whose output is growing impressively. For an E & D issue, watch Reservoir Minerals (OTCPK:RVRLF), a Canadian junior in 45-55% partnership with Freeport McMoRan (NYSE:FCX) in developing some rich copper and gold projects in Serbia.

Pick your spots and get on board. There is greater likelihood that the PM sector will rise substantially than that the Fed's magicians or the denizens of the Executive and Congressional branches of government will repair the economy's structure.

Disclosure: I am long AG, SLW, MUX, KGC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. I own precious metal companies in two mutual funds.