On
the heels of historic movements in key global markets, today 40-year
veteran, Robert Fitzwilson, put together another tremendous piece.
Fitzwilson, who is founder of The Portola Group, laid out the roadmap
from a gold bottom to a coming mania. Below is Fitzwilson’s outstanding and exclusive piece for KWN.
Fitzwilson: On June 27th, in a note to
clients and friends of the firm, we suggested that the panic in the
metals and mining sectors was so extreme that it had to be a bottom by
everything we have experienced and studied in our careers. The chart
below suggests that our call was correct, at least based upon what has
ensued so far.
The top line is the Amex “Gold Bug's Index” (HUI) which represents a
basket of gold mining companies. The bottom two are for the S&P 500
and gold. The returns in the chart are for the period since our call
to the close of trading last week. As you can see the Index nearly
tripled the return of gold itself.
“It is also interesting that the Index
nearly tripled the return of the S&P 500 Index in that same period.
Hardly a trading session goes by without the headline being “The
S&P 500 and the Dow Jones Indexes hit new highs”. The reality is
that the bulk of the stock market strength that had been so loudly
touted occurred during the first quarter of this year.
The gains for those two
indexes have been good, but the HUI has significantly outperformed
traditional stocks since our call for a bottom. Just last week alone,
the HUI advanced almost 7% against a 1% move for the S&P 500 Index.
For a few of the marquis mining names, the returns have been as much as
a double over that of the HUI since late June.
There is a long way to go
to recoup the declines that began late last year, let alone reaching the
heights one typically sees in the mania phase. However, if this is a
new bull market for the mining companies, it will most likely be a grind
to reclaim the lost ground in the short-term characterized by sharp
moves to the upside and then consolidation. For one reason, the
sentiment against the miners is probably the worst for any sector that
we have ever seen.
In late June, it was not
just disdain for the sector, but something near to hatred. It will take
time and higher prices to bring back the investors that panicked and
sold, let alone the new wave of investors that much higher prices will
bring. What makes for a great bottom in any asset class is that
transition from “it will never go down” to “I’ll never own that dog
again”. It reminds us very much of the bottom in the mid-1970s for
stocks.
The other factor that could
slow down the recovery in prices for the miners is the pricing of the
underlying products, gold and silver. The decline has not been about
economics. You cannot have a global, massive run on available stocks of
anything in a declining production environment and expect to see major
price declines. Whoever or whatever is causing it is everyone’s
favorite topic for speculation, but we know that the decline has no
basis in economic or market theory.
It is true that part of the
fundamentals are working against the mining companies such as the
rising price of energy and declining ore grades, but those factors
should have been handily offset by the surge in demand and subsequent
scarcity. Followers of King World News are well aware that none of the
pricing makes any sense at this point.