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December 5, 2005

Goldminer stocks are lagging the bullion, Mon., Dec. 5, 2005, 5:47 PM

An interesting phenomenon is happening to precious metal stocks. A sell-off in many North American issues has continued a second day, running opposite to the higher move in bullion.

I'll try to figure this one out.

Clearly Friday and Monday were down days in the equity market, caused by profit taking among the leaders, and gold and silver stocks have been leaders for sure. They have pulled back, or at least stayed flat.

And just as clearly, the bullion prices have been moving higher because there is a strong appetite around the world for precious metals, as opposed to paper money and securities. The supply of precious metals is quite limited. If central banks do not put supply onto the market, as seems to be the case lately, then the price of the bullion will have to rise, and it has.

In fact the only thing that is going to pull back precious metal prices at this point will be the satisfying of consumer demand, caused by a blow off price spike to the upside. In other words, all the buyers find a price they are prepared to pay " regardless how high that might be " and then poof, no more buyers.

Do I think this might happen? Yes, I think it is inevitable. I just don't know when.

I do know that the potential buying power is virtually unlimited. It far outstrips the potential supply.

So the size of the appetite is all that has to be measured. Do you remember the story of Tulip Mania in 17th Century Europe?

Well, gold has always been precious, and unlike tulips, which wither and die, and tulip bulbs, which can be easily grown, gold has no supply "issues". At some point there just isn't any metal to buy.

Demand is not infinite, of course, but when you look at government spending and debts today, and personal debts, and the inflated prices of assets backing up a large part of that debt, it's fair to say that demand for gold could go to extremes, if not forever.

Under the microscope this week will be the psychological $500 inflection point. Is demand for gold going to blow right past $500 or will demand pull back.

Isn't that a question better suited to cab drivers and hair dressers?

Posted by Posted by Bill Cara on December 5, 2005 05:47:30 PM | Category: Bullion , Gold , Goldminer Producers

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