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The Gist

Gold prices held above 1,670 on Friday after a rallying for the past seven sessions to five month highs. In July, European Central Bank President Mario Draghi stated the ECB was prepared to do whatever it takes to preserve the euro, advancing the EU currency versus the dollar.

Gold is currently climbing out of the eleventh 10% correction since 2003. Gold has always bounced back and soared higher each time. Gold has been up 10 out of the last 10 years. I was bullish on silver and gold, but with the latest performance of the precious metals and announcements by the ECB's Draghi and the strong possibility of the Fed implementing another round of QE, I am extremely bullish.

I believe gold and silver at their current levels provide an excellent buying opportunity. Several geopolitical and macroeconomic catalysts have ignited my interest in precious metals, specifically silver and gold.

The Details

Macro Catalysts For Precious Metals

  1. Gold has been up 10 out of the last 10 years. As fiat currencies continue to be devalued by quantitative easing, gold will march higher in value.
  2. 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, the recent weakness is not an outright fundamental issue with gold but a temporary technical phenomenon that will soon dissipate.
  3. 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.
  4. Gold is incredibly under-owned by institutions relative to historic levels and relative to differing asset classes.
  5. If the dollar's value dwindles further and worldwide economies recover, investor focus will swing from deflation to inflation which bodes well for gold.
  6. The deviation between mining stocks and gold is huge by historical standards. In due course, this trend will reverse and the gap will return to normal levels. Miners have curtailed their growth forecasts and earnings outlooks which will accelerate the pace of rebound as they exceed their lowered expectations.
  7. As the middle classes of China and India emerge, their demand for gold will rise exponentially. Special occasion gifts are mostly conveyed in gold in these countries. India is the largest importer of gold peaking at nearly 850 tons per year.

The Breakdown

These are my top five precious metal plays. Please review the following detailed descriptions of each company or ETF. These investment vehicles provide a diverse set of precious metal plays that are highly correlated to precious metal spot prices. The following Charts were provided by Finviz.com.

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SPDR Gold Shares (GLD)

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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 (SLV)

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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 (GDX)

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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.

Newmont Mining Corp. (NEM)

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Newmont is trading well below its consensus estimates and its 52 week high. The company is trading 31% below its 52 week high and has 22% potential upside based on the analysts' consensus mean target price of $60.29 for the company. Newmont was trading Friday for $49.29, up slightly for the day.

Fundamentally, Newmont has several positives. The company has a forward PE of 10.05. Newmont's current net profit margin is 8.10%. The company has a PEG ratio of 1.64. EPS is expected to grow by 52% over the next five years.

Technically, Newmont is on the threshold of fulfilling an extremely bullish double bottom reversal pattern. Newmont's stock price has recovered substantially in the past few weeks. The stock has been hammered since the start of July. Wait for the stock to break above the high point between the two troughs of $52 to confirm the trend change prior to starting a position. Newmont stands to gain significantly if gold prices continue to climb. The stock is a buy.

Silver Wheaton Corp. (SLW)

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SLW is trading well below its consensus estimates and its 52 week high. The company is trading 19% below its 52 week high and has 27% potential upside based on the analysts' consensus mean target price of $43.38 for the company. SLW was trading Friday for $34.05, up slightly for the day.

Fundamentally, SLW has several positives. The company has a forward PE of 16.24. SLW has a PEG ratio of 0.58. SLW pays a dividend with a yield of 1.18% and, according to Finviz.com, has a net profit margin of 73%.

Technically, the stock looks great. The stock has bounced off a bottom of $22 in May and is now in a well-defined uptrend. The recent somewhat parabolic move makes me wary of starting a position today though. I would wait for a pullback to start a position.

The Bottom Line

I believe these stocks present a buying opportunity. The ETFs GLD and SLV are the pure plays. The gold miners may be subject to operational delays and the cost of mining precious metals is definitely going up.

The recent correction in precious metals has provided an opportunity to buy great names at a discount price. With central bank printing presses cranking up across the globe and the cost per ounce to mine precious metals increasing, the upside is infinite. Precious metals are not simply safe haven plays. They are also hedges against currency debasement risk and inflation.

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. If you choose to start a position in any stock, I suggest layering in a quarter at a time on a monthly basis at a minimum to reduce risk and setting a 5% trailing stop loss order if you wish to minimize losses even further.

Source: Can't Fight The Fed: An Untold Run In Silver And Gold Will Unfold