-- Posted 16 January, 2008 | | Discuss This Article - Comments:

The Wallace Street Journal

By David Bond, Editor

The Silver Valley Mining Journal

Wallace, Idaho – There is something very seriously haywire in the markets right now. Gold and silver bullion rule the roost; their underlying stocks are in the bucket. We're scunnered, watching our portfolio of equities droop, while at the same time wondering if it's time to haul a little of our bullion off to the hock shop and take a bit of profit.

This makes no sense, but look at the numbers. The silver- and gold exchange-traded funds (ETFs), respectively SLV and GLD, have set recent generational highs. This week's corrections still put them within a point or four of their 52-week highs: statistical noise.  But look at the underlying mining biggies we track: Hecla is down 25% over the same period; Sterling, more than 50% off its previous high for the past year; U.S. Silver is down 45%. Silver Standard is off some 24 points; New Jersey is off 48%; the mine-canary Canadians we track are off, on average, 50% of their recent 52-week highs. The Silver Valley issues aren't faring much better. With the exception of SSRI, these are producing entities, and SSRI will join those ranks soon this year.

This makes no sense. There is something seriously haywire.

The classical explanation, vis-a-vis the silver market, is that silver stocks tend to lead the bullion price. In other words, the physical metals are overbought and will come to Jesus and right themselves with the performing mining equities. Which means we could see $12.50 silver and $650 gold this year, if you apply the old spreads.

But a couple of things have happened in this still-secular current bull market – and this writer believes that we are on Step Two of a perhaps Five-Step metals bull market that will extend well into 2020 and beyond – that a smart player needs to consider.

Firstly is the presence of the ETFs. These are new critters, with no back track record. You could not play a naked silver or gold price bet in 1966 or 1977 – the tsunami-tripping earthquake years of past memory – without haggling with the corner coin shop dealer or pawn shop and hauling home rounds or bars. Not now. You don't need the requisite credit rating to buy a futures contract now for a silver or play, either. As little as $160-something (plus commissions and spread, of course: the usurers must extract their vig) will get you a $16.00 bet on the future price of an ounce of silver.

Several bright guys we've spoken with – from the CEO of a major silver-producing company in Idaho to a serious long-player in Boca Raton – think the ETFs have sucked the money out of the silver and gold equity markets. Reasons abound. You belly-up to Barclay's bar, your only risk is price exposure. You snag up an IPO on a silver explorer, gobs of stuff can go wrong, beginning with a crooked board of directors and ending with nationalization of the mining industry in the extant country and seizure of your asset.

Another huge unknown, of course, is the Internet and its attendant availability of information and trading tools. DARPA and the Web weren't even apples in their daddies' eyes when Silver last took her run to $48 during the 1979-1980 winter. We all flocked to our broker in 1979, who controlled all information, to seek places to run to or flee from. The control was in the broker's hands. Now it's in the hands of we geeks, who can go to websites, scour Yahoo, and form our own conclusions. The herd mentality remains, but it is up to us, not our broker, to parse.

But then, as now, the quality of information reigns supreme and is just as elusive. You can read web-site hype or those elegant paid-for “analyst technical review” papers commissioned by some huckster, and you're still just as ignorant as the chalk-stained bum hanging around the teletype at the Spokane or Denver Stock Exchange three decades ago. Regulations, penalties, political correctness, have not driven off the accomplished shill.

Don't trust the financial rags or the newspapers to help you, either. To a much greater extent than they were in 1980 they are corporation-owned and your welfare and wisdom are the least of their concerns. We speak from nearly 30 years of editing and writing for daily newspapers of all sizes in North America: the printed word is not your friend. Which leaves even less to be said of CNBC, or Bloomberg, or Fox News.

So what's a poor boy to do? This writer does not write about, nor does he invest in, any property he has not personally visited, nor does he write about, nor invest in, any company whose management he has not spent some time with. You can learn much about rocks and the people who want to play with those rocks by spending some time with them.

Here are some contrarian thoughts regarding the prevailing wisdom:

First: the ETFs have not sucked the speculative money out of the silver and gold junior markets. They're just the bullion-players of yesteryear, but in far larger numbers. The real money has yet to enter this equity market. No-one of a risk-adverse ilk every played the pennies. The ETFs merely have engaged the weak sisters, the panic-prone, the dollar-silver fence-straddlers. And the ETFs are a good place for these boys and girls, because they will not panic and go short at the first sign of a bum diamond-drill hole or a periodic metal correction and take down a worthy explorer.

Second: the rewards of playing silver stocks are manifest in their recent down-turns. If you want to buy a Hecla, a Sterling, a U.S. Silver, a New Jersey, a Silver Standard, significantly cheaper than what is quite plausibly their near-term growth potential, why would you not?

You're reading this rant because you have figured out the U$ Dollar is bunkum. Our savings and our earnings have been pitched to the wolves by the dirty Fed. A bet on the worst mining issue on the planet is probably a long sight safer than a bet on Bernanke, or Citigroup, or whoever is left standing when the paper falls out of the sky.