Stocking Up On Silver And Gold
Curtis Hesler, Professional Timing Service 03.31.06, 9:15 AM ET
MISSOULA, Mont. - Oh my gosh. I think I need to put myself in manacles. I have been watching silver zoom higher over the last week or more, and I have been sitting on my hands. I make it a practice never to chase strength--that is the best way I know of to get into serious trouble in the markets. Nevertheless, it is getting more difficult each day, and although discipline is paramount in a successful investment program, I may need a stronger restraint.
Silver has been the star since last fall when it left the $7.00 level. It marched right up to $11.00 this week and managed a wiggle or two along the way. But over the last three weeks, it has been on a regular rocket ride.
Gold has been no slouch either. After putting in a high at $585 June basis in early February, it has been sliding sideways between $585 per ounce and $540 per ounce. It is pushing the top of its trading band again now, but it hasn't been as big a deal as silver. Silver is where the greatest seduction lies.
Momentum In Mining Shares
The mining shares have been marching to their own drummer during all of this. Although the XAU (Philadelphia Gold and Silver Index) reached a peak a bit earlier than gold at $151.90 on Jan. 31, it dropped about 20% top-to-bottom. Gold has only seen a total retracement of 7.6% since the first of the year, and it is currently closer to its highs than its lows. The mining shares as represented by the XAU have recovered, but they are not threatening their highs just yet.
The exception is in the silver stocks. They have been stronger than the XAU--or gold or silver, for that matter. It sure is tempting to jump in here, but I am seeing all sorts of caution flags.
Traditional overbought-oversold measures are warning that one should wait for a better opportunity. Silver is in dire need of a rest, and I see cyclical highs due right now. On a seasonal basis, we typically see a prime buying opportunity in the metals in May, which is also when my work indicates the next cyclical lows will form.
It is time to overcome the emotions in the metals market and employ some discipline and reason. These markets need to take a break.
One can emphatically argue the strongly bullish longer-term fundamentals. Supply and demand is out of balance in favor of higher metals prices, while the dollar is vulnerable to some serious downside adjustment. And there will likely not be peace in the Middle East until the countries there campaign for statehood. Iran is a bigger tar baby than Iraq, and the West is anxious to start poking around.
There are very few fundamental negatives against owning gold--just a few against buying it at this time. We are faced with bearish, short-term technical factors in a strong long-term bull market.
Pure Play On Silver
There are two possible courses of action. One is to be disciplined and wait for prices to sell off some, and then buy. If you are looking for what to buy, my main suggestion would be Silver Wheaton (amex: SLW - news - people ). This little wonder was born out of a defensive move by Wheaton River Minerals (amex: WHT - news - people ) against the hostile takeover attempt last year by Coeur d'Alene Mines (nyse: CDE - news - people ).
Former Wheaton River CEO Ian Telfer spun off Wheaton's silver interests into a separate company, which is Silver Wheaton. However, the clever thing is that Silver Wheaton only owns silver production from various mines around the globe; they don't actually operate any mines or even own any equipment. You see, silver is produced as a consequence of mining for other metals like copper, zinc, lead and gold. In a sense, Wheaton is similar to a royalty company.
Silver Wheaton only has five employees. They describe themselves as the only public mining company with 100% of their revenue from silver production and expect this production to grow to 20 million ounces in 2009. They are also unhedged.
If I were going to buy something in the current market and pay too much, it would be Silver Wheaton. I see silver well over $25.00 in the future; and likely, it will surpass its lofty highs set back in 1980. It may well sell back some, but not likely all that much.
I would suggest that if you are impatient, you buy some here and then buy more if profit-taking sets in. A year or two from now, this company stands to become something much greater than it is today.
The other approach is for if you are the patient sort (as I am when I am unchained from my desk). If you are, I would be a buyer of Silver Wheaton under $10.00. It has nice technical support between $7.00 and $8.00, but that doesn't mean it will actually fall that far back. Why not nibble a little here and buy more during weakness?
A Tale Of Two Gold Corporations
Now, let me tell you about two gold mining companies. One is called U.S. Gold (nasdaq: USGL.OB - news - people ), and the other is called Goldcorp (nyse: GG - news - people ). If you are definitely the patient sort, consider U.S. Gold. They are selling just above $7 per share, so you really need to wait for this one to pull back before buying.
Trading in these OTC bulletin board stocks can be pretty thin at times. Unless you really know what you are doing, only buy with limit orders. I would put my orders in at or below $5.00 and see if you get lucky.
U.S. Gold is being developed by Chairman and CEO Rob McEwen, who came from Goldcorp where he turned the Vancouver-based miner from a $50 million investment company into what is perhaps the best gold-mining operation on the planet with a market capitalization pushing $10 billion.
After Wheaton River Minerals was acquired by Goldcorp in a friendly arrangement amid the nasty Coeur d'Alene affair, Ian Telfer moved from CEO of Wheaton Minerals and took the helm at Goldcorp. McEwen left Goldcorp and took over control of USGL.
McEwen is currently in the process of making some serious acquisitions. U.S. Gold has immense potential with their properties in Nevada, and both Telfer and McEwen are, in my estimation, the best operators in the business.
The time is not ripe just yet, but a coming consolidation in the precious metals arena will offer some superior opportunities to take advantage of the next up leg in this long-term bull market.
Curtis Hesler is editor of Professional Timing Service. Click here for more of Hesler's analysis and a complete list of currently recommended stocks in Professional Timing Service.
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