Gold Bullion - Junior Mining Stocks Benefit from Stabilizing Stock market

Junior Mining Stocks - With the Stock Market Panic behind us - for now - we are settling in for a range bound, relatively calm, second half of ’08. Junior Mining Stocks should finally start to benefit as the wet blanket smothering equity markets lift and will allow for the Gold Bullion Market to rise.

The New York Stock Exchange indicator for new lows reached an extreme of 1304 on Tuesday the 15th of July. That was even worse than the 1100 new lows reached on the 22nd of January. Such extremes spell one thing P-A-N-I-C.

Whilst it’s difficult to infer any far reaching conclusions about one day sell-offs, even panics, the odds now favour a bounce in very oversold equity markets. As for how high and how long the stock market will bounce is anyone’s guess, but here again, probabilities favour the market to move higher and longer than anyone expects so that sentiment indicators return to their old complacent Bullish state!

What will work during this period of ‘relative’ calm?

We had noticed a very definite flight to safety since market volatility began in October ’07.

Firstly, a flight away from common Dow stocks to Junior Mining Stocks:
(The following charts show relative performance of asset classes to each other. That is, when the chart is falling the first asset class (DOW) is underperforming against the second (Gold Stocks).
1 - Large Cap Mining Stocks (GDX ETF) have outperformed the Dow (DJIA) since August 2007

Within the Gold market this has manifested itself as a flight to bullion and away from Junior Mining Stocks:

Chart 2 - Gold Stock ETF has underperformed against Gold Bullion ETF since August 2007

And a shift from smaller more speculative junior mining stocks to their large caps cousins:

Chart 3 - Minefinders (for example) has under-performed against the large cap Gold Stock ETF

Now that there is a good chance equity markets will stabilize, the above trends will moderate and reverse. This means Junior mining stocks prices should begin closing the valuation gap and discounting higher earnings based on $900+ Gold.

The remainder of 2008 looks set to be very bullish for Gold Stocks and junior mining Stock in particular!

More commentary and stock picks follow for subscribers…

Chris Vermeulen
Chris@TheGoldAndOilGuy.com

I am a trader and newsletter writer specializing in the price of gold GLD ETF, Junior Mining and Energy Stocks listed in the US, Canada and Australia.

This article is intended solely for information purposes. The opinions are those of the author only. Please conduct further research and consult your financial advisor before making any investment/trading decision. No responsibility can be accepted for losses that may result as a consequence of trading on the basis of this analysis.

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