With the recent strength in the euro currency, the spot prices of gold and silver have been stronger. Share price action in mining stocks has a very high correlation to underlying commodity prices and they’ve been moving up as well.
I still believe in the commodity price cycle and that exposure to precious metals and other commodities should be a component of an investment portfolio this decade. The fundamentals are there to support higher prices for gold and silver. We have inflation (which is underreported), strength in emerging markets, strength in the industrial economy, huge increases in the M2 money supply (in other countries as well), debasement of the U.S. dollar…the list goes on. Silver is probably the better trade now for new money.
If the U.S. economy were to show improvement over the coming quarters, then gold, silver and oil would all soar. While there remain major structural hurtles to gross domestic product (GDP) growth in the U.S. economy (mostly related to the housing market and sovereign debt), I think the economy is stronger than current consensus. We’ve got incredible low interest rate stability. Right or wrong, the Federal Reserve is doing everything it can to re-inflate prices and, given GDP strength in the fourth quarter of 2011, I would say monetary policy is actually helping.
Gold, silver, and mining companies boast very good outlooks this year and next. You always have company-specific investment risk in dealing with mining companies and it’s fair to view the entire sector as speculative. But, it’s a sector in which the right stock can produce major capital gains. There aren’t too many stock market sectors that offer this potential right now.
I look at the stock market’s current trading action and I view it as quite healthy. Share prices and investor sentiment are vulnerable to the Greek situation, but this is getting to be old news now. With conviction, the market already expects a sovereign debt default at some point. This is why I’m a little surprised that gold and silver aren’t higher in price right now. The stock market’s performed very well since the beginning of the year and it should keep ticking higher.
I’m certain that institutional investors want to be big buyers of U.S. equities; they’re just waiting for a catalyst or a little more certainty. Stocks, gold, silver and oil prices should move commensurately over the next few quarters, opposite to the U.S. dollar. As I wrote previously, I’d like to see some improvement in the Dow Jones Transportation Average. With this confirmation, the stock market could easily move higher. (See also The Stock Market’s Next Best Trade Is Shaping Up.)