I am now bullish on gold and silver based on gold's current sell-off, the immediate incessant berating of the precious metal by pundits on CNBC and several other reasons. Silver is highly correlated to gold. In October 2008 the precious metal plummeted 18% and subsequently rebounded 23% over the next two months. I accurately predicted this move in an article I wrote on Aug 24th. The following is a brief description of gold’s current performance, my reasons why precious metals are a buy followed by my top seven precious metal picks.
Current Gold Performance
Gold settled at $1,577 today just above support at $1,560. Gold made a comeback from prior piercing drops in previous sessions. A weak dollar and short covering were purposed reasons for the recovery in price. The price of gold is still near its three month lows, losing nearly 10% in the past two weeks, although volatility for the commodity in the current session was nominal. This will be gold’s first monthly tumble since September and frailest December performance since the 2008 debacle.
Top Five Reasons Why Precious Metals Will Soar In 2012
- This is the eleventh 10% correction for gold since 2003. Gold has always bounced back and soared higher each time. Gold has been up 10 out of the last 10 years.
- A major portion of the drop can be attributed to a well-known year end occurrence regarding gold's performance in December. Gold market makers have closed up shop for year end. The big gold commodity funds have closed up for the year and have essentially stopped buying.
- Many hedge funds and major market participants have had to liquidate their gold positions recently due to the global liquidity crunch created by the eurozone debacle. Therefore, this is not an outright fundamental issue with gold but a temporary technical phenomenon that will soon dissipate.
- Recently many central banks of emerging markets lowered their interest rates, consequently lowering the cost of borrowing. In most cases inflation will outstrip the yield on savings, creating negative real interest rates. Thus, investors will take flight to precious metals and protect their wealth from devaluation.
- The relative strength index on spot gold remains below 30 indicating an oversold market which could attract buying.
Top Precious Metal Picks
My top ways to play precious are as follows: Market Vectors Gold Miners ETF (NYSEARCA:GDX), SPDR Gold Shares (NYSEARCA:GLD), iShares Silver Trust (NYSEARCA:SLV), Barrick Gold Corporation (NYSE:ABX), Newmont Mining Corp. (NYSE:NEM), Goldcorp Inc. (NYSE:GG) and Silver Wheaton Corp. (NYSE:SLW). These stocks and ETFs are highly correlated to precious metal performance. Please review the following short descriptions of each company or ETF.
SPDR Gold Shares - The investment seeks to replicate the performance, net of expenses, of the price of gold bullion. The trust holds gold, and is expected to issue baskets in exchange for deposits of gold, and to distribute gold in connection with redemption of baskets. The gold held by the trust will only be sold on an as-needed basis to pay trust expenses, in the event the trust terminates and liquidates its assets, or as otherwise required by law or regulation.
iShares Silver Trust - The investment seeks to reflect the price of silver owned by the trust less the trust expenses and liabilities. The fund is intended to constitute a simple and cost-effective means of making an investment similar to an investment in silver. Although the fund is not the exact equivalent of an investment in silver, it provides investors with an alternative that allows a level of participation in the silver market through the securities market.
Market Vectors Gold Miners ETF - The investment seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the NYSE Arca Gold Miners Index. The fund generally normally invests at least 80% of its total assets in common stocks and American depositary receipts of companies involved in the gold mining industry. It is non-diversified.
Barrick Gold Corporation engages in the production and sale of gold, as well as related activities, such as exploration and mine development. The company has a portfolio of 25 operating mines and a pipeline of projects located in North America, South America, the Australia Pacific region and Africa. It also produces copper and holds interests in oil and gas properties located in Canada. The company was founded in 1983 and is based in Toronto, Canada.
Newmont Mining Corporation, together with its subsidiaries, engages in the acquisition, exploration and production of gold and copper properties. The company’s assets or operations are located in the United States, Australia, Peru, Indonesia, Ghana, Canada, New Zealand and Mexico. As of December 31, 2009, it had proven and probable gold reserves of approximately 93.5 million equity ounces and an aggregate land position of approximately 27,500 square miles. The company was founded in 1916 and is headquartered in Greenwood Village, Colorado.
Goldcorp Inc. engages in the acquisition, exploration, development and operation of precious metal properties in Canada, the United States, Mexico and Central and South America.
Silver Wheaton Corp., together with its subsidiaries, operates as a silver streaming company worldwide. The company has 14 long-term silver purchase agreements and 2 long-term precious metal purchase agreements whereby it acquires silver and gold production from counterparties located in Mexico, the United States, Canada, Greece, Sweden, Peru, Chile, Argentina and Portugal. Silver Wheaton Corp. is headquartered in Vancouver, Canada.
A contrarian is one who attempts to profit by investing against the grain, to go against the crowd, because the crowd is usually wrong and always late. A contrarian believes that certain crowd behavior among investors can lead to exploitable opportunities. Pervasive cynicism about a stock or sector can drive the price so low that it exaggerates the investment's perils and belittles its future prospects. Identifying and seizing on these opportunities is a well-known investing tactic utilized by legendary investing experts such as Warren Buffett and Whitney Tilson. I believe these precious metal related stocks may present such an opportunity.
Use this information as a starting point for your own due diligence and research methods before determining whether or not to buy or sell a security.
Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NEM, GG, ABX, GLD, SLW, SLV, GDX over the next 72 hours.