Wednesday, January 5, 2011

Strong 2011 Expected for Gold Shares Despite Initial Weakness

We have seen a sharp two day correction so far as gold and silver continue to consolidate gains. This type of action is healthy as it shakes out new participants who are not fully committed to the investment. Silver in particular was incredibly strong in 2010, and has very recently been digesting those gains. But it could be the gold shares which surprise in 2011.

With gold stocks trading down another 2.25% this morning, the gold stocks have started 2010 down roughly 8%. Although this is a weak start, many professionals believe that 2011 will be a strong year for mining shares. Eric Sprott of Sprott Asset Management believes that a move from 540 on the HUI to the high 800’s is in the cards.

As gold and silver continue this consolidation pattern it should shake out some of the bullish enthusiasm and lead the way to the next move higher. Having said that, with gold at current levels, gold shares should have incredibly strong earnings and cash flow and this should lead to much higher prices for the mining stocks as Sprott predicted.

As the shares rise, we should see more consolidation in the sector. This will be good news for many investors in the junior sector. Quality juniors with solid projects should be acquired in 2011 by mid-tiers and majors. Even though the juniors had a bid in them during 2010, by and large is has been a rough ride for many years as investors have waited patiently for the next run in these shares. If Eric Sprott is correct about coming strength in the HUI, this should produce extremely high returns in the junior sector.

Eric King

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