Gold And Silver's 'Tipping Points' Puts These Stocks In Play

by: Marc Courtenay

"A gold mine is a hole in the ground with a liar on top"--Mark Twain (1835-1910)

The above quote involves some intended humor as well as some harsh words. Remember, a gold mine can also be a hole in the ground filled with tons of gold ore, with a seasoned geologist "on top".

The big questions in the precious metals world right now aren't about gold and silver mining. The two big questions at the moment are as follows. First, is gold and silver in a corrective phase that may involve an intentional shake-out of the "weak hands"? The second question is, are we more likely to see gold and silver consolidate at current levels and then move higher?

Gold prices dropped $77 per ounce last Wednesday, supposedly because Fed Chairman Ben Bernanke didn't mention anything about the possibility of another round of Quantitative Easing (aka "QE3") in a speech he'd given that day. Comments on Monday, March 5th by Federal Reserve Bank of Dallas President Fisher in which he stated "investors should prepare for less easing", keeps this topic filled with both controversy and confusion.

Dr. Bernanke's congressional testimony last week didn't change any of the fundamental reasons why millions of citizens and many governments around the world want to own gold and silver too.

Last Wednesday, during floor and electronic trading, the gold price ranged from $1,792 on the high to $1,688 on the low, a $104 intra-session price swing. As one well-known professional in the precious metals business wrote last week, "I think the real question about Wednesday's dramatic drop and today's [March 1st] gold trading is, is this really a weak hands clean out, or is this a "Dead Cat Bounce" rally, within a gold market reversal?"

After the close of trading on Monday, March 5th, gold remained above the important $1,700 per ounce level. This could be interpreted by some as an encouraging short-term signal that last week's price plunge was, "...a cleaning out of small investors and speculators".

On the other hand, if gold falls below $1,700 per ounce and begins trading at $1,680 or below, that could indicate that the recent rally off Thursday's lows was a "Dead Cat Bounce". Perhaps that would mean we may see the prices of both gold, silver, as well as the mining stocks, heading lower.

What to do...What to do?

Monday's closing New York gold price was close to $1705, and silver ended the day around $33.92. No matter which direction precious metals prices are heading in the near-term, there will be opportunities to either go long or go short using the top 5 holdings of the Market Vectors Gold Miners ETF (GDX).

As of Jan.31, 2012 those top 5 holdings are: Barrick Gold (NYSE:ABX) , Goldcorp (NYSE:GG), Newmont Mining (NYSE:NEM), AngloAshanti Gold (NYSE:AU) and Silver Wheaton (SLW). Whether you choose to buy the stock or go long by buying deep, "in-the-money" LEAP options", these 5 companies should continue to do very well in a world where gold is at-or-above $1,600-an-ounce and silver stays above $30.

If someone was inclined to "short" these stocks they might want to consider slightly "out-of-the-money" put options, or consider a "bear put spread".

My best, most reliable sources indicate that both gold and silver will be going higher before any sustained correction. Barron's proclaimed on Monday March 5th after the U.S. markets closed, "Don't fret about gold...despite the severe change in short-term conditions, the long-term bull market in gold is still very much intact." If they are correct, I especially want to own the kind of big producers mentioned above, and the world's largest silver streaming company, Silver Wheaton. The news and reasons why SLW could literally go up 100% or more over the next 12 months has been rather ubiquitous. Read the company's website carefully and you'll be able to draw some of your own conclusions.

Three other mid-tier precious metals producers to strongly consider are Yamana Gold (NYSE:AUY), IAMGOLD (NYSE:IAG) and Kinross Gold (NYSE:KGC). AUY and KGC are both in the top-ten holdings of GDX. This 6-month comparison chart shows how these three producers have traded. So far, Yamana has been the significantly better performer. It may be time for KGC and IAG to play "catch up" based on a comparative valuation standpoint.

Concerning the junior gold miners: I recently bought shares of one of them, namely International Tower Hill Mines (NYSEMKT:THM). THM holds a 100% interest in the Livengood gold project, covering an area of 145 square kilometers located to the northwest of Fairbanks, Alaska. It purchased an adjacent "Placer Claims" and last week reported a "Historical Resource" on the property.

My suggestion is that THM is best purchased below $5 per share, and I recently learned it's a "top takeover target" according to the analyst who follows the company at Casey Research. If you want to buy or sell a "basket" of junior gold miners to spread out your risk, consider the Market Vector Junior Gold Mine ETF (NYSEARCA:GDXJ). Remember the juniors are not for the faint of heart. They aren't for the risk adverse investors either, because they experience great levels of volatility.

So one might ask, "When will we know the answers to the two big questions mentioned at the beginning of this article?" The most likely answer is "soon, maybe even sooner than we think".

Disclosure: I am long ABX, GG, NEM, AU, SLW, AUY, KGC, IAG, THM, GDXJ.