How the Hype Cycle Applies to the Gold Mining Industry

February 13, 2012

BY: Robert Hallberg, Topics: US Dollar

I went to the Cambridge House Resource Investment Conference this past weekend in Indian Wells, and I stumbled across an interesting theory in a speech made by gentleman named of Jim Letourneau. The topic of this speech was, âWhat Happened to the Commodity Bull Market?â and in his speech he explained how the hype cycle applies to the gold mining industry.

Now gold and silver has certainly done well over the last couple of years, but it is true that many mining companies have been trading sideways, and not made new highs since the panic of 2008. A bull market should in theory be a lot of fun with plenty of money making opportunities. But the last couples of years have not looked anything like a bull market for anyone invested in the mining shares. The charts show two most popular and widely watched indices for gold and silver stocks; the Philadelphia Gold and Silver Index (XAU), and the NYSE Arca Gold BUGS (HUI). They both confirm the sideways movements among gold stocks.

NYSE Arca Gold BUGS (HUI):

Commodity bull markets tend to last for about 17 years of average and this one started around 1999 so by historical measurements there should be several years left, with 2016 as a potential end date. The question Jim Letourneau asked is; âif we are still in a bull market, and by all signs it appears that we still are, then why havenât the mining companies done better?â Their earnings are certainly up since 2008, yet their ticker price is not.

The performance of the stocks may be explained by a theory called the hype cycle. The hype cycle provides a graphic representation of the maturity and adoption of an industry, a new technologies or application, and how it is relevant in solving real business problems.

The hype cycle describes how you can detect whatâs commercially viable when new technologies or application make new bold promises, giving you a view of how a company or an application will evolve over time, providing a more realistic insight of how to manage expectations. This is just as true for new mineral discoveries among mining companies as it is for new technologies.

The hype cycle has five stages and Jim Letourneau believes that we currently are in the âtrough of disillusionmentâ. There were a lot of discoveries made over the last couple of years, and a lot unrealistic expectations were built up. These unreasonable expectations were shattered during the panic of 2008 and the prices came crashing down.

However, we are now in a situation where many gold and silver mining companies are becoming very profitable. As the growth in these companies becomes ever more evident, their share price will in all likelihood continue to rise again but in a more realistic manner.

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