Opportunity of a Lifetime

Eric Muschinski |

This is an important time as I feel we’ve hit the potentially opportune time to be deploying cash into our favorite gold/silver mining shares. For those of us with some cash to put to work, this is an opportunity of a lifetime. Seriously, we could look back on this battered sector in awe two years from now and marvel at how cheap we could have scooped up fire sale-priced shares in quality companies. Look at the bullish percent index here on a weekly chart:

Gold Miners Bullish Percent Index 3-15-03(Click to Enlarge)

Bear markets beget bull markets and vise versa. Typically, no I take that back, ALWAYS there is a correlation to the upside to follow that is inverted to the previous bear cycle. This would indicate the next cyclical bull market in mining stocks should be quite powerful. If you examine the chart above, you see the dramatic moves to the downside in red is followed each and every time by a vertical move higher in white. This time, the bullish percent index is the lowest I’ve ever seen in my life, which means the carnage currently is brutal, and an opportunity. For those of you who understand point-and-figure charting and bullish percent, this reading is rare and quite extreme. In virtually any market or sector, once you see a reading even in the teens, it’s time to start moving the “offense on the field”.

The action wouldn’t seem so egregious if the price of gold was under $1,000 an ounce, but it has yet to break down below $1500 an ounce, and is holding this important line in the sand:

Gold Spot Price 3-15-03(Click to Enlarge)

The XAU index to price of gold ratio is at its highest point on record, even more so than the extreme melt down of 2009, taking nearly 12x the index to buy an ounce of gold. The long-term average on this ratio is near 4-to-1, which would indicate a tripling of gold stocks to get back to this mean. Now, much has been said about the major stock indexes break out into new highs as a reason that gold-mining shares have been neglected and thrown out the window. This may be true to an extent but let’s look at what large cap equity investors have reaped since 2003 versus the price of gold, NOT in dollars. In dollars the averages are at new highs, but this is a nominal return, not real. We say this as a reminder that if your stock portfolio rises 17% but over the same period the currency in which you bought it declines by 15%, you only have a “real” return of 2%, which is very important. Look at the performance of the DOW in gold:

DJIA vs Gold Spot Price 3-15-03 (Click to Enlarge)

According to this Dow-to-gold ratio, since 2003 you have lost two-thirds of your money if priced in gold. This also bodes well that we are seeing this rally now in equity indexes as the long-term likelihood is that, by the end of this secular cycle, we will see this ratio fall to below 5 (five ounces of gold to buy one share of the DJIA), and some believe it may go 1-to-1.

Remember when the Fed started pumping astronomical amounts of money into the system in 2008-2009 and everyone feared immediate inflation to hit? What was the number one reason over and over why that did not occur? The velocity of money. So, now we have a slightly improving economic environment where the mood of consumers and businesses are improving due to a higher stock market. Also, we’re seeing banks begin to lend out more cash as well. What is this going to free up? The velocity of money. I believe this cyclical bull in stocks and cyclical bear/correction in gold and mining shares is the perfect set up for the third phase of parabolic upside in gold as the public finally rushes into the market taking gold to our target of $3200 an ounce and silver to $150 an ounce.

St. Louis Adjusted Monetary Base(Click to Enlarge)

The monetary base is projected to explode again going forward per the chart above.

Just a return to a normalized resource sector market may garner significant percentage gains in the months and years ahead. We’ve identified several special situations including a NYSE-listed exploration company with one of the largest undeveloped gold deposits in the world and a market capitalization reflecting $6 per ounce of gold in the ground! Also, a junior exploration company on the cusp of production that, in their second year of production may generate cash flow twice their current market value! These aren’t ploys, they are real circumstances that our subscribers are capitalizing on currently.

For actionable ideas in the junior resource mining sector, go to Goldinvestmentletter.com

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer


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