How to Profit From The Precious Metals Bull Market

In 2001, I identified precious metals as starting what I think will be a huge bull market.

Today, in 2007, I think we have many more years for it to run.

The easy thing to say is, "The bull market will last until you go to parties and hear everybody talking about how much they made in the gold market." Or until you hear stories of people selling their gold teeth. Or until your pool cleaner gives you tips on gold stocks.  

None of these things has happened yet. I think we are years away from having them happen. Every bull market announces itself quietly, so quietly that few listen.

But before this bull market is over – and I see it lasting well into the next decade – it would not surprise me to see gold at $3,000 and silver at $187.50. For silver, this would require a 1,307% increase from today's price, versus a 353% increase for gold. Selected stocks should do even better than this.

To me, it is clear that gold is still in a bull market. All the signs are there...

First, the fundamentals... Central banks around the world are pumping out paper money to ward off deflation and engage in competitive devaluations.

Governments around the world are desperately trying to keep their currencies from appreciating too much, which would kill off exports. But all the currencies cannot become cheaper against all the other currencies. At best, it will be a race to see who can cheapen the quickest, with first one "winner" and then another.

But the ultimate beneficiary will be gold. It is not easy to find and mine new gold, not nearly as easy as creating more money and credit. It is only a matter of time, I think, before gold really takes off.

Second, when you see chart after chart, many gold stocks are already in nice bull patterns. If they fall, they never fall below the previous lows.

Third, most people are not paying attention to them, and if they are, most of them do not believe they are in a bull market.

And right now, the long-awaited correction in metals is now clearly underway. After a huge run-up from May 2001 to May 2006 it was time for a rest.

Markets are like human beings in one important way: They cannot sprint indefinitely. They need to rest from time to time. This is true for even the athletes among us in the best possible shape.

The question becomes, how long will this correction, or rest, last? And more important, how best to handle it?

The first lesson is that these "down periods" are going to happen. No price goes in one direction forever without stop.

The second lesson is that they can last far longer that most anyone thinks possible.

The third lesson is to psychologically or physically remove yourself from the game during these times, keeping at most one eye on a bull market marking time.

You don't have to careen around the world partying – you can take up gardening, scuba diving, mid-19th century Italian opera, Ming Dynasty ceramics, the collected works of great authors, or any one of a thousand things so that you don't fall into the trap of obsessively and daily watching frustratingly tight trading ranges that last for years.

But by all means, remember that after a period of frantic price rises, a rest will follow as surely as you yourself have to rest after a good, strong sprint. That's why now is a great time to start accumulating.

Because we have been in a correction or consolidation phase of the bull market, I would strongly advise anyone who does not have enough of the metals to use this time to start buying.

Each person has to decide for himself how to play this. To anyone who asks me if it is too late to buy, I say this: I think everyone should have some gold and silver, and some mining stocks. But that exact percentage will and must differ with each individual.

You should not have so much of it that you won't be able to sleep at night when they plunge and stay low for a year or more.  

Notice that I said "when" they plunge and not "if." Silver especially has been and will continue to be a volatile rollercoaster. Times will come when it almost certainly will plunge by 25% in a few days. If you have too much, you will be prone to panic and sell. It's possible we will see price plunges of 50% over a very short time.

Only you can decide how much of your total investments should be in the precious metals area. I would say at least 10% should be. But you must be comfortable with whatever percentage you choose. Not too small that you don't profit, but not so large that you panic along the way.

That 10% (or whatever percentage is right for you) of your portfolio allocated to gold and silver, should emphasize the actual metals. Ideally, you should own a number of ounces in your own name at a safe bank.

But if you cannot do this, then what I recommend you do instead is buy theiShares Silver Trust (SLV) and the streetTRACKS Gold Shares (GLD).

These two exchange-traded funds (ETFs) were created to track the spot prices of gold and silver, respectively. Other than holding actual gold and silver, these two ETFs are a good way to take a position in the metals, without having to take actual possession. You can buy these through any regular broker.

Only after this, you should have some metals stocks. Have a number of them if possible.

How long will this rest period for precious metals be? No one knows. I mentioned last May a target of one year. But I knew that it could easily be longer. During the huge bull market of the 1970s, a three-year rest period separated the first bull leg from the second one.

So be calm and patient. Don't be frustrated. If you have profited from the huge rise in the metals from 2001 to last year, then recognize that this is a time for the markets to rest.

If you have come to the game more recently, this is a time to patiently accumulate ounces of gold and silver, while at the same time building up your stores of interest-bearing cash.

Good investing,