Bull Market in Precious Metals: Largest Gains Still Ahead

by: Chris Mack

With gold up over 25 percent and silver up more than 64 percent year to date, many investors are wondering if they missed out on the bull market in precious metals. Even if you already had a substantial allocation towards precious metals, it's easy to kick yourself from not buying more. Silver has tripled since its 2008 lows and some stocks such as SLW have risen 10 fold in a short two years.


While smart money and early investors have enjoyed large gains over the decade long bull market in precious metals, the big money and mania money is yet to be made. The bull market is now in the institutional phase, also known as phase two, where hedge funds, banks and pension funds are bidding up prices of metals and miners. As the bull market has matured, investment strategies should be modified to accommodate the phase two bull market, with a pending phase three mania.

Phase two and phase three bull markets are driven by increasingly larger volumes of incoming capital flows. This can be seen in the rising trend of open interest as well as stronger bids on corrections. Price movements upwards will get larger and corrections will become shallower in duration as can be seen in the October precious metals correction. This presents challenges to both new and veteran investors.

Investors already in the market will have a tendency to want to take gains, but should resist the temptation to sell everything. As Jesse Livermore once said, "throughout all my years of investing I've found that the big money was never made in the buying or the selling. The big money was made in the waiting." The fundamentals are still in favor of much higher gold and silver prices and until that changes the long term trend will remain upwards. Real interest rates are in double-digit negative territory, and money supply growth is still in double-digit positive territory.

Despite the real possibility of waking up tomorrow to find that silver has doubled or gold is up $200, investors new to precious metals would be prudent to avoid buying in a lump sum. Both gold and silver are technically overbought and could succumb to a sharp correction. Thus the best strategy kept by professionals is to accumulate using small orders over a period of time and keep on buying where cash flow permits. If prices do correct, then increase the size of the planned purchase by pyramiding orders based on price.

Investors should also consider diversifying the type of precious metals investments that they hold. While the physical metal has outperformed gold stock indexes in recent years, this is expected to change. The financial meltdown of 2008 left many companies unprofitable, and without the credit to continue business. PAAS, SSRI, AUY and others are still well below their 2008 highs despite gold prices of $1400 and silver prices of $28. Price premiums were shifted from explorers and junior producers to large, well capitalized, producing miners. Now that credit is more available, and metals prices are much higher, capital has just begun to flow into the smaller juniors and explorers as investors realize that they hold the future supply.

While the easy money in gold and silver has been made the largest gains are still ahead. Long term investors should sit tight and continue to accumulate, and those who consider gold and silver insurance should not even consider selling as the global decline in fiat currencies is just beginning.

Disclosure: Long SLW, PAAS, SSRI