Don’t Give Up on the Miners

06/02/2011 8:00 am EST

Focus:

Lawrence Roulston

Editor and Publisher, Resource Opportunities

Though mining shares have lagged the gains in metals prices, their future still looks shiny, writes Lawrence Roulston in Resource Opportunities.

The first few months of 2011 have taken mining investors on a wild rollercoaster ride.

Gold, silver, copper, tungsten, and a number of other metals surpassed record highs in the first part of 2011, before dropping hard in recent days. Share prices rose, but for the most part lagged the gains in the metals—and then fell hard when the metals dropped from record levels.

To a large extent, the gains in gold and silver resulted from a global move to safety, as economic and political turmoil around the world is unnerving many investors. Both metals rose too far and too fast. A period of consolidation is appropriate at this time.

Even with the recent declines, both of those precious metals are well above their levels at the start of the year: gold (GLD) is up 8% and silver (SLV) is 24% above the level at the end of 2010.

There are a couple of factors in understanding the divergence between the metal prices and the equity prices. Perhaps most important is the general move to safety.

  • In a time of uncertainty, investors favor bullion over the riskier equities. In fact, total metal holdings in gold exchange traded funds have fallen, as more investors have taken direct ownership of bullion.
  • Secondly, it sometimes takes time for investors to adjust equity values to reflect higher fundamental valuations. In time, the equities will regain a linkage to the metals. In the meantime, those companies that are adding value by advancing their projects will gain investor recognition.

I expect to see gold and silver remain volatile in the near term, but in the medium term to maintain the current levels or to show some further gains. At this time, many share values are at attractive levels. There is further risk to the downside, but there is also the risk of missing a buying opportunity.

Many very knowledgeable investors are picking up shares at the current levels, and will likely become aggressive buyers if prices fall further.

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