November 9, 2010 – It has been just one month since I stated on King World News that the gold mining stocks had begun a new bull market. The XAU Index of mining stocks closed that day at a new record high of 206.79. It closed yesterday at 220.17, up 6.5% over this period.
That is a tremendous gain in such a short period of time. But do not let that spectacular performance keep you from buying and accumulating my recommended mining stocks. They remain good value, as is clear from the following chart that measures the XAU Index in terms of gold.
What the above chart is saying is that:
1) The last sell signal in the mining stocks was given in early 1997, which coincides with the huge bubble surrounding Bre-X. Since then, the mining stocks have been closer to the buying area, and not even near the selling area. This means that the best strategy over this period is the one I have been recommending, namely, pursuing the ongoing accumulation of mining stocks because you are buying stocks that are undervalued.
2) Gold has outperformed the XAU Index this decade, which is another way of saying that the mining stocks were in a bear market. Their bear market began with the collapse of Bre-X and ended with the collapse of Lehman Brothers. The mining stocks suffered badly in the liquidity squeeze arising in the aftermath of the Lehman collapse, and we saw a classic selling climax. The mining stocks were driven to a low level never before experienced.
3) Since the 2008 selling climax, the XAU Index has been climbing. But importantly, as the above chart illustrates, the XAU Index is still well within the buying area. Therefore, the gold mining stocks are still cheap, and so are the silver stocks, some of which are included in the XAU Index.
I therefore continue to recommend the ongoing accumulation of mining stocks because you are buying stocks that are undervalued. Those values will eventually be realized and rewarded with higher prices as the precious metals make new highs, which in turn will continue to draw more money into the sector.
The bull market in mining stocks is barely one month old. I expect the XAU Index will be moving higher for three to five more years.