Our Favorite Stocks to Watch as the Gold Bull Kicks Back into Action

We were a bit early to say that the Gold Selloff Would Not Last. After pausing at 340, the HUI continued all the way down to support at 300. But 300 proved to be very solid support and the Gold Bugs Index bounced off this mark and charged all the way to a new record at 387. That is a gain of nearly 30% in just a month! More importantly, the HUI has broken through resistance at 370, which has turned back the HUI on five separate attempts over what has been a lackluster year of consolidation in the gold market.

We disagree with other pundits who are cautioning that gold will pull back from these levels. While we may see a short bout of consolidation to form the handle of this classic cup and handle set up, we don’t anticipate any significant pullback and believe that the 360-370 level that has acted as resistance for so long, will now become support.

This latest surge has the hallmarks of being more than another head fake, and should see the HUI charge above 400 in the coming days. Not only has the HUI finally broken and held above 370, but this has been accompanied by the dollar breaking down through key support at 80, oil making new highs above $80, and a significant increase in Middle East tension. Throw in the fact that The Bank of Spain, which has recently been the biggest seller of gold, has just announced that it is finished selling any more of its gold, and you have a convergence of forces that are aligning and will finally see the gold bull kick into action again.

The momentum indicators in the chart below show that gold stocks still have plenty of room to run before being overbought. And, if this is indeed the resumption of the gold stock bull, we will see a return to the impressive uplegs that characterized the first four years of this bull market. More specifically, we are talking about uplegs of 50% or more, followed by retreats in the 20-30% range. While the last year of consolidation has erased these memories from the minds of many investors, we expect this next wave to be a potent reminder of how powerful this bull can be when it gets kicking. Thus far, the HUI is up 30% from its bottom at 300, leaving us with a target somewhere above 450 for the HUI, and $850 for gold before any serious correction is due. From a technical standpoint, we have a large enough base (over a year of consolidation) for such an impressive move to take place.

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A good strategy for most gold investors, and certainly for those new to this sector is to pick up Market Vector Gold Miners ETF (GDX). The Gold Miners ETF seeks to replicate as closely as possible, before fees and expenses, the performance of gold- and silver-mining companies as represented in the Amex Gold Miners Index. The Amex Gold Miners Index includes common stocks, and ADRs of selected companies involved in mining for gold or silver ore. The Index consists of 37 equities, representing a diversified blend of small-, mid- and large-capitalization mining companies.

But for those investors with a higher risk tolerance, picking the individual miners with experienced management, promising properties, and a solid business model could lead to much higher returns. A few of our favorite gold and silver mining companies are listed below.

Yamana Gold (AUY) Our Analysis of AUY

Seabridge Gold (SA) Our Analysis of SA

Silver Wheaton (SLW) Our Analysis of SLW

Tagish Lake [TLG.V] Our Analysis of TLG

Northern Orion (NTO) Our Analysis of NTO

Metalline Mining (MMG) Our Analysis of MMG

Newcrest Mining (NCMGY.PK) Our Analysis of NCMGY

Golden Star Resources (GSS) Our Analysis of GSS

Disclosure: We own positions in these stocks and believe they will outperform their peers by a significant margin. Of course, you should perform your own due diligence and are solely responsible for your investment decisions. These are simply the companies that we favor most.

Comments

[EE]

Why are you avoiding silver and Ted Butlers' work and credit to him? Last week the gold silver ratio was 56/1 this week it is less as expected and on the way to 1/1 over the next 8 to 15 years. Why not feature SIL, Apex Silver ? It is like a mutual fund of junior mining stocks that just begun producing silver,lead & zinc from a very major mine in Bolivia and has great political support in shakey suroundings. Those surroundings have overly depressed the stock into an addtional bargain beyond currancy and silvers low ball price.

[Jason Hamlin]

I am not avoiding silver. I am a huge fan of Silver Wheaton, which is a pure play on silver and included in our list of recommended stocks. I read both Ted Butler and Jason Hommel and agree that silver has some promising fundamentals. However, I expect gold to outperform silver during recessionary periods, which we should be approaching soon (despite rate cuts). Gold is more widely seen as a store of value and hedge against a declining dollar, while silver's price rise may be somewhat suppressed by declining industrial demand from a cooling economy, particularly developing nations. I could be wrong, but those are my thoughts.