PM Bulls, Why the Long Face?

In spite of false claims of falling demand, gold and silver are actually victims of hedge fund and investment bank liquidation. Although gold and silver are expectedly at cyclical lows, many investors and even gold bulls are in panic mode.

In fact, there’s been a full divergence between gold and silver index prices (on commodities exchanges and ETFs) and the price of the physical metal. For example, the silver American Eagle common date coins usually sell near the market price per silver ounce; however, they’re now selling for 50% higher than that amount. That’s right, physical silver prices (and gold as well) are not nearly as low as market prices. Furthermore, the US Mint will not sell silver American Eagles until further notice.

Physical gold and silver prices are actually doing quite well this year (see chart below). In 2007, you may recall that gold spent most of the year trading below $ 690 and its 2007 high near $ 840 didn’t occur until November. This year, gold has risen above $ 900 each and every single month thus far. Yesterday’s pullback below $ 800 should be seen as a great buying opportunity for traders and investors.

Similarly, silver spent the majority of 2007 near $ 13 an ounce reaching highs of just $16. In 2008, silver has remained above $ 16 for most of the year and recorded astounding highs above $21. Over the past 3 months, the correction has brought opportunities to get in on the hottest precious metal.

Physical gold demand has not decreased even in the face of global metals ETF and contract sell-offs. Thus the question for precious metals bulls remains, why the long face?

Now consider these recent events:

- The America’s largest coin dealers continue to report difficulty filling customer orders and an unprecedented surge in business.

- German gold demand is up 10 fold and dealers run out of bullion as investors seek safe haven.

- India will start selling gold by the gram at post offices nationwide.

- The Indian gold buying season, Diwali starts next week, in time for a cyclical high at the end of the month.

During the global market downtrend over the last few months, the dollar has quietly risen into extremely overbought territory and the charts signal a big tumble is imminent (see chart below). Today, just 2 days after the full moon cyclical low, we’re calling for a reversal in $ USD index. This usually means positive gains for equities and precious metals — right on target with our late October new moon high forecast.

Mining Through the Credit Crisis

The price of gold hit a low near $ 835 a few days after last month’s new moon. It’s still possible that prices will re-visit lows near next week’s full moon. Nonetheless, our mining stock pick hit rock bottom in yesterday’s global sell-off, a bit earlier than our anticipated full moon low. RBY’s chart looks bullish for the next week but we expect prices to trade sideways for a few days before increasing. Both gold and RBY should then hit cyclical highs near the end of the month.

Gold and other precious metals prices actually advanced yesterday as smart money sought a safe haven. With the first genuine bank run in our lifetimes in full swing, sagging global indices, and ultra low interest rates, it seems precious metals markets are one of the only places to go.

Mining stocks, however, are in doubt as smart money just isn’t sure about which ones can survive in a tight credit market. The attendees of the Toronto Resource Investors Conference noted that the mood was much more sour than last year as mining companies themselves fear failing without the necessary exploration loans. In our opinion, credit should still be widely available to sound companies for the following reasons:

- The $ 850 B bailout plan was passed and signed into law
- The Federal Reserve didn’t wait for the vote to inject another $ 630 B into world credit markets. This comes after having injected $ 38 B in August and $ 200 B in March of this year alone–truly astounding.
- Over the past week, world central banks injected another $ 500 B into the credit markets.
- Today Australia joins the Bank of England and the ECB in cutting interest rates.

Here’s why we think our current mining stock trading pick, Rubicon is a safe bet:

- Since mid-August, average daily volume has more than doubled, signaling that it has at least attracted some new traders and investors.
- As opposed to precious metals and other mining stocks, RBY hit new 2008 highs just 3 weeks ago when the rest of the markets were down.
- This year, it has consistently found new mineral rich zones at its Red Lake, Ontario (Canada’s biggest gold producing region this year) suggesting gold grades as high as 10 to 26 ounces per ton. By comparison, big miners Barrick Gold and Newmont Mining have properties with gold grades of under 1 ounce per ton.
- Its other mining properties are in mineral-rich Nevada and Alaska.
- Goldcorp founder, Rob McEwen is trusted and respected in the mining sector and owns a 40% stake in Rubicon.
- The company’s properties and exploration technology make it a big acquisition target.

Obviously with so many more greenbacks flowing in our financial system, there should be plenty of credit available. Moreover, there’s no way the dollar can maintain itself at present market values. In fact, over the past month, M1 and M2 money supply has exploded at the fastest pace ever. All these trillions of dollars being injected in one form or another mean that precious metals and solid mining stocks are on their way up. Although we’re unsure exactly when the bank failures will stop draining investor confidence in mining stocks, at least gold and silver ETFs are good for trading.