The prices of gold and other precious metals are in correction and therefore gold and other precious metal stocks are in correction. I think it’s particularly important for stock market speculators to be paying attention to this sector as it corrects. There are a lot of very attractive mining companies out there with lots of cash and great producing properties.
No matter what the story, the fact of the matter is that precious metal stocks trade commensurately with underlying spot prices. They tend to trade on their own, not lockstep with the rest of the stock market. A mining company could be generating outstanding production and earnings growth, but stock market investors (I should say speculators, because mining stocks are 100% risk-capital investments) are always looking to the future and that means if the spot price is going down, so must precious metal stocks.
As a stock market sector, precious metal stocks have been in decline for some time now and valuations are getting to be very attractive. If you were interested in speculating in this sector, I’d put together a list of five top companies right now within the group and start following them. The spot prices for gold and silver may continue to correct for another couple of quarters, but I really feel that the upward commodity price cycle isn’t finished quite yet, especially with the underreported inflation in the U.S. economy.
Precious metal stocks take their lead from gold prices and, at $1,600 an ounce, the correction in gold hasn’t been that bad at all. Because precious metal stocks are considered to be risk-capital investments, speculators within the group tend to follow a herd mentality. This is especially the case with institutional investors. This is why it’s a stock market sector that can really pay if you get in ahead of the group. As is almost always the case, once the news is in the headlines, most of the money has already been made. If there ever was a stock market sector that is perfectly suited for the buy-low, sell-high investment philosophy, I can’t think of a better one.
Precious metal stocks are tricky to get right as an equity market speculator, because there are so many factors at play in order to run a successful mining business. There’s always the potential for equipment failure (which stops/slows production), a change in government policy, or exploration drilling that doesn’t meet expectations. But when everything comes together correctly and the spot price of the underlying commodity turns upward, precious metal stocks can generate excellent stock market returns in a short period of time. (See One of the Best Sectors for Risk-capital Speculators.) It’s similar to the biotechnology sector where a new drug discovery or approval can send shares soaring.
Right now, the stock market isn’t much interested in precious metal stocks and that’s why equity speculators should begin paying closer attention. I don’t think the correction in precious metal prices is over, so, generally speaking, I’d be waiting and watching.