By Chris Weber, editor, The Weber Global Opportunities Report

Saturday, September 5, 2009

My readers know that while I am prepared to see the great stock bull rally that began in March continue, I see it as a rally within a bear market.

If that is the case, at some point, the stock market which has gained so very much since March (in many cases the most since 1933 in the last six months) will fall apart. If that happens, will that take precious metals stocks with them?

I usually see each asset group on its own terms, and not automatically connected with any other asset class. And while stocks in precious metals companies are stocks, the major ones have been in a bull market since the end of 2000. Compare that with the general markets, which have been going nowhere since that time.

I’m going to show this using the Gold Bugs Index, symbol ^HUI. This is an index of 15 large mining companies that mine gold all over the world. Most are North American-owned, but some come from South America as well as South Africa.

You can see that since the gold bull market began in December 2000, this index soared from 35 to 500 just over eight years later in March 2008. That was an increase of 1,329%. During this exact same time, the Dow Jones Industrials rose only 12%, from 10,700 to 12,000.

But since March 2008, the gold mining shares index started to fall. It has now fallen from 500 in March 2008 to the current 409. That is a fall of 18%, and it lowers the entire sweep of the bull market for these metals stocks to only 1,069% from December 2000 until today.

But the Dow has also fallen back from its March 2008 levels. About 12,000 then, it is now 9,441, or a loss in the last 18 months of 21%. The Dow has gone from 10,700 at the end of 2000 to just 9,441 today. This is a loss of 12%. Remember, during the same time, the Gold Bugs Index has soared 1,069%.

Granted, huge falls in the Dow have taken down all stocks, even the precious metals ones. But I think something bigger has been going on. Over a multi-year period where the Dow and the global indices have gone nowhere or even lost, the large gold stocks have risen sharply.

Over the longer term, this means they have been following the bull market in physical gold more than they have been affected by the lackluster performance of stocks during the last decade or so.

I think that the era which began in late 2000 and early 2001 has marked the start of a new bull cycle in gold and the other precious metals. I further think this trend has more to go. Yes, all stocks can be sold off in a panic. And yet when gold itself stops its corrective phase and resumes its bull run, I think the precious metals stocks will continue to outperform, over time, the more general stock market.

This said, I would not advise holdings that are only large mining stocks, with no physical gold.

Physical gold did not rise as much as precious metals stocks from 2000 to March 2008. But on the other hand, it has not fallen so far from its peak. Spot gold is down at this writing about 1% from its peak 18 months ago.

My advice continues to be to have both. Own the physicals for the basic meat and potatoes (or rice, or pasta, depending on where you live) of your overall holdings, but own large stocks to add the spice.

As for small mining companies, or companies that are just in the exploration stage, the last year or so has shown how badly these can be hit. Many lost over 90% of their value over a few months. For me, this is too much spice.

If your stomach can take it, go ahead. But be aware that while you can make thousands of percent if you are lucky, too many people get too greedy in this area and end up losing more than they put up.

Me, I’d be happy with the 1,000% returns of the ^HUI since the bull market began nearly nine years ago. Today, you could use the GDX as a proxy for the ^HUI index: GDX was not available back when the bull market began in 2000.

Over the shorter term, precious metals stocks can get hit along with all other kinds of stocks. But as long as the long-term gold price is in a bull market, whatever these short term losses end up being will be much more than overweighed by their outperformance when gold makes another big leg up.

Good investing,

Chris Weber

Editor’s note: Simply put, Chris Weber is one of the best investors we know. He started investing at 16, and by the time he finished high school, he was rich. The fact is, in over 35 years of investing, he has never been wrong about a major market call (but he’s so down-to-earth, you’ll never hear him brag about it). If you’d like to learn where Chris is putting his own money right now including his three favorite gold and precious metals investments click here.