A battle royale is brewing between gold bulls and commercial traders who are short gold, says Brien Lundin, publisher of Gold Newsletter.
That tug of war, which should play out in the coming weeks, could result in either a severe correction or a spectacular rise in the price of gold and silver. No matter which way it goes, in this interview with The Gold Report, Lundin recommends that investors continue to look at companies with world-class resources that are still being priced at a fraction of what their values should be.
Lundin should know; some of his recommendations are up more than 400% from December and January.
Brien Lundin: We are on a razor's edge right now. The new gold rally has been somewhat confirmed by silver also beginning its own rally and by the mining stocks leading the charge ahead. On the other side, however, we have a massive, historically large net short position that's been built up by the large commercial traders. Typically, when the large commercials have built up such large net short positions, it is followed closely by a severe correction in gold.
Right now, we have a battle royale between the bulls in gold and the large commercials that are short the market. There is a chance that the bulls could continue to buy and force the large commercials to begin covering their shorts. This hasn't happened often during this long turnaround in gold since the turn of the century, but it has happened on occasion. When it does, we see spectacular rises in the price of gold and silver and in the values of mining stocks.
The next few weeks will tell the tale because the commercials will either be forced to capitulate or they will force their whims upon the market, and we'll have a fairly severe correction. Even so, that correction would represent a buying opportunity over the longer term because the commercials will reload at the bottom of the market, will cover their shorts and then the cycle will begin anew.
Great Panther Silver One-Year Chart
TGR: How would you recommend that investors position themselves in this environment?
BL: They should continue buying companies that have large, world-class resources that are still being priced at a fraction of what their values should be in a buoyant metals market. We've seen a number of these companies advance very strongly in gold and silver over the last couple of months, but there are opportunities in other metals, as well as in some gold and silver companies that are a bit farther down the food chain and more toward the exploration end.
I've liked gold and silver for a while. At the end of the year, I recommended that readers of Gold Newsletter buy companies that had large gold and silver resources to prepare for the big move that I saw coming. That actually happened, and we've had these tremendous rallies in gold, silver and the related mining stocks.
There are some companies in other commodities that are similarly positioned. One of the commodities that I really like is uranium. The fundamentals for the uranium market virtually guarantee a significant price rise over the next year or two. The utilities have been relying on contracted supplies of uranium for the past few years, and these contracts are now expiring. So over the next year or so, the utilities are going to be forced to come back into the market and start buying uranium to lock in future supplies. This will require a significant rise in the price of uranium. There are a few companies that are very well positioned for this.