Something Ventured, a Lot Gained

11/01/2010 11:32 am EST

Focus: GLOBAL

David Coffin

Editor, Hard Rock Analyst

Something Ventured, a Lot Gained             

Canadian mining stocks are in need of a timeout after the fast break to record highs on the TSX Venture Exchange, write David and Eric Coffin of The Hard Rock Analyst.

The last month was one of those classic speculative runs that make everyone who trades resource stocks feel pretty smart.

The current run has been strong enough to start bringing the bears out of their short hibernation with warnings about near-term collapse of markets, and especially resource markets. We don’t see the backdrop for that sort of event, though we do acknowledge the (smaller miners) have had it all their way for few months now. There is growing room for consolidation. 

On that basis alone, it makes sense to be looking for opportunities to harvest some profits. Things could still move higher for a while, but it’s rarely a bad idea to bring down your average costs and position yourself to do some year-end shopping.

Precious metals had a very good month, with gold hitting a number of all-time nominal highs and silver reaching prices not seen since the Hunt brothers (tried to corner the market in the early 1980’s).

Viewed on a three-year time frame, (gold’s) gains are impressive, but (they don’t) look much like a bubble. The advances have been measured and interspersed with consolidations. Gold has traded with the equity markets as often as against them lately. Clearly there is something other than just “insurance” driving the buying.

The most obviously correct answer is the dollar trade. The US dollar topped just about when the major markets bottomed this summer and the pullback since then has been impressive. The US Dollar Index is off almost 14% in four months, a huge move for the world’s reserve currency.

In fairness, the levels major indices are trading at are not really that bullish. The Standard & Poor’s 500 is only up a couple of percent for the year and is still several percent off its April highs—hardly levels to be viewed as irrational exuberance.

One market that definitely is exuberant is the TSX Venture Exchange, our proxy for exploration stocks. It’s been a heck of a run for the past three months. Unlike most indices, it has seen new highs and is up over 15% for the year.   An impressive performance, but the Venture is the exchange most likely to be moved by metal prices, and they have very much gone the right way.  It’s also worth noting that, so far at least, the Venture has been moving up on strong volumes, something that can’t be said for larger markets.

So, what can go wrong? Metal prices could top out near term. We don’t think the gold bull is over, but this is a pretty long run of luck. We’re most comfortable with gold when it is backing and filling. Precious metals are due for consolidation, which would cool off the junior (miners,) too.

Many in Washington and other G7 capitals are feeling plenty horrified already (over high unemployment). With fiscal measures seeming to have little impact, it is understandable that central banks are falling back on a “whatever works” attitude. Not healthy, admittedly, but supportive of the market for a while longer.

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