Is The Bull Market Over For Precious Metals ?

In general analyst believe precious metal investments currently represent great value in comparison to other investment opportunities. It is important to look at investing from as broad an overview as possible. Looking at a few months of a stock chart is like reading only a few sentences in an entire book. You only get part of the story. It is much easier to make a profit investing in a very slow moving, long term monthly chart, than a short term intra day chart. When an investor backs up and reads the full story, the picture and strategy to make money becomes clearer. It is believed that commodities in general and precious metals specifically are currently available at a sale price.

So what does the story of investing look like today? We know that as individuals people can be very unique. However, group behavior is much more predictable. On average, a large group of people will react in a similar fashion under certain circumstances. Knowing this fact can help us understand investing patterns. However before we look at the investing patterns, let us get some stock market facts clear.

Facts About The Stock Market

  1. All markets are cyclical. Most investments go over good times and bad times. However to make a profit from an investment, where the investment is in its cycle is very important.
  2. All major market trends will not end until an extreme is reached in the direction traveled. Once that extreme is met, like a pendulum swinging, the new trend will start and will not end until the extreme is met in the other direction.
  3. Major investment markets have relationships to one another that do not change over time. (For eg, Real-estate, Bonds and Stocks tend to move in the opposite direction to Commodities.

A Lesson From History
1970 – 1980: This was the time of extremely high inflation. Interest rates were rising from an extreme low to an extreme high, peaking around 1980. The cost of everything was rising during this time period. As an investment, commodities did fantastic, while stocks, bonds and real-estate did not do well. Silver and Gold reached true bubble status as gold peaked around 2300% higher than its low and silver peaked around 2700% higher than its low.

1980 – 2003: This was the time of steady but much slower inflation. Interest rates were falling from their high in 1980. Stocks, bonds and real-estate flourished. Commodities had flown so high during the 1970’s it took two decades of falling prices to re-balance the previous bubble, and as commodities fell, stocks, bonds and real-estate hit bubbles of their own. The Dow Jones increased from about 800 to 12,500. Major stock indexes, bonds, and real-estate hit key extremes to the upside. They became very expensive and their two decade rise could not continue at such a pace. Real estate market flourished with house prices reaching record high levels. On the other hand commodities had been neglected and overlooked as an investment class. Precious metals became one of the most hated asset class around. But that changed. Starting in 2000 commodities started to head higher as stocks started to head lower. Stocks were coming from an extreme high and commodities were coming from an extreme low.

2004 – 2007: This period has been an interesting time. In 2004, interest rates hit an extreme low, thanks to inflation. However come 2006, the interest rates have been rising. If the inflation is not under control, it is logical to expect interest rate will continue to increase until they hit an extreme high. This is similar to the market conditions of the 1970’s. Additionally in 2007, the dollar value is weak, the housing market is down, the oil prices are rising. All this works in favor of precious metals, especially gold and silver. Not long ago commodities in general hit an extreme low and it is now reasonable to assume they will continue to rise until they hit an extreme in the opposite direction. (Currently gold is priced at 660$ and silver around 12.90$).

Conclusion: In general analyst believe in 2007 commodities are not a poor investment. Contrarily, they believe that even though they have been a poor investment in the past, they are a fantastic investment now. After more than two decades of a major bear market for commodities they do not expect the following bull market to be over in a handful of years.

  • You classify commodities and precious metals as if the same, yet the stocks around them tend to trade quite differently. Commodities tend to have fairly low P/Es and precious metals have high P/Es.

    Although I think there is reason for precious metals to continue to remain strong in their price, I think many of the stocks have built in excessive valuation.

  • Generally I think pm stock prices have very little to do with standard measurements like P/E and what-not. It’s more about the appreciation of the underlying commodity and how much dirt the company owns.

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