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Posted 5/23/2005
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Gold and silver won't be down for long
The selling in precious-metals stocks has been overdone. This creates opportunities, but be warned: gold and silver, and gold and silver stocks, are very volatile.
By Bill Fleckenstein
The true geniuses of the investment world are those folks who can learn from the mistakes of others, rather than having to make every mistake themselves. But these people are rare birds indeed. Nearly everything I've learned in the financial markets has come from making my own mistakes.
The school of hard-currency knocks
Obviously, if you don't learn from your mistakes, you eventually won't have any money with which to invest. To quote noted market observer Ray DeVoe: "Good judgment comes from experience, but experience comes from bad judgment."
Or, I might put it this way: Good judgment comes from bad judgment. It's a bit like lifting weights, in that you gain through pain.
The subject of pain brings me to the recent carnage in the precious metals. (Editor's note: Gold futures on Comex in New York have fallen from an early March high of nearly $450 an ounce to about $420; silver has fallen from $7.64 to about $7.15 an ounce.)
Anyone who has operated in this arena for any length of time knows that the precious metals can be volatile and somewhat unpredictable. Therefore, one has to give them wide berth when building positions.
It is also important to recognize that precious metals are a form of insurance, that they are there to do well when nearly everything else does poorly. Sometimes, they can do well (as has been the case at times over the last couple of years) even when things are still "going OK."
In terms of the metals stocks, I note that, on the way up, Newmont Mining (NEM, news, msgs) traded at current prices in the summer of 2003, when gold was about $345 an ounce. Ditto for Pan American Silver (PAAS, news, msgs) in the fall of 2003, when silver was about $5.40. So, the recent prices of these stocks are back to where they were when the metals prices were much lower. That said, the explosion in mining costs has hampered them from making any serious money, even though bullion prices are higher. (Disclosure: I am a director of Pan American.)
A selloff in its golden years?
But rather than conclude that the metals stocks are indicating much lower metals prices, I think the selling in metals stocks is getting overdone. I believe that the correction in precious metals/precious-metals shares is closer to the end than either the beginning or middle -- though it's impossible to know in advance when the decline might stop or what might stop it. All we can do is look for clues. Should we see events that make sense to us, we can add to our positions if we have that flexibility.
Related news and commentary on MSN Money
Recently, I've been buying Newmont Mining (and gold itself), having been fortunate to have sold some earlier in the year. Last Monday, I also re-established a portion of my prior euro position, after having exited my position in January. At this time, I'm not sure if I will stick with the euro if it goes against me. I might just flush it and try again down the road.
As for France's referendum on the EU constitution on May 29, I think that a yes vote will most likely produce a pretty decent bounce in the euro (now trading at about $1.26.) If the French vote no, it could wreak havoc on the euro. To my mind, either outcome ought to be bullish for gold. Also, this time a year ago was when prices for both Newmont and gold bottomed. Of course, that doesn't mean they will bottom now, but it is worth keeping that in mind.
Why I think silver looks good
In response to several e-mails as to why I have been buying silver recently, I'd like to share my reasons for being especially constructive on silver at this time:
- Lease rates indicate a certain amount of tightness in the silver market.
- If one looks at how well silver has performed (which admittedly is subjective and potentially dangerous), it's about the only metal that's actually up on the year. That is potentially a harbinger of a tighter supply/demand environment.
- If you look at the speculative position by viewing the Commitment of Traders Report, the net long position held by speculators never got as extreme relative to its history as gold did, and the report is reasonably constructive at the moment.
- There have been signs of good physical demand recently at prices not far away from today's levels. In the past couple years, prices needed to get a fair bit lower to see much physical demand.
All in all, silver feels better to me than does gold at the moment. Of course, silver being silver, a 3% or 4% move to the downside could happen at any time, though I would guess we'd need to see a major move lower in either gold or the euro to precipitate that.
All roads will lead to higher prices
Despite the recent carnage, I continue to be very constructive on the outlook for the metals, especially given that the Federal Reserve is trapped. Short interest rates are now a whopping 3%, and folks can see the amount of pain that's already occurred in the financial community -- and we're not even close yet to the underlying rate of inflation.
Consequently, no matter how I approach the process, I keep coming back to the same point: Eventually, all roads will lead to higher metal prices.
Bill Fleckenstein is president of Fleckenstein Capital, which manages a hedge fund based in Seattle. He also writes a daily Market Rap column on his Fleckenstein Capital Web site. His investment positions can change at any time. Under no circumstances does the information in this column represent a recommendation to buy, sell or hold any security. The views and opinions expressed in Bill Fleckenstein's columns are his own and not necessarily those of MSN Money. At the time of publication, he was long Newmont Mining and Pan American Silver.
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