Dang! I was really hoping for a deeper pullback in gold - the potential buying opportunity of the decade. My Red-Hot Global Resources portfolio is light. And I was licking my chops at the chance to load up on excellent stocks at bargain-basement prices.
Well, maybe we'll get that deeper pullback. Maybe we won't. In any case, I'm seeing enough bullish action in gold right now that I'm starting to leg into new positions.
4 Reasons I Like Gold Now
Reason #1: It Sure Looks Like Gold Is Holding Its Uptrend
In fact, looking at this chart of the SPDR Gold Trust, a fund that holds physical gold, you can see that not only is it in an uptrend, but that uptrend is accelerating. This recent pullback just brought it to the most recent weekly uptrend.
Reason #2: Recent Attempts to Sell Gold Have Been Met by Big-Fisted Buying
Heck, traders tried to take gold lower on news that China's GDP growth is expected to slow to 9.1% in the third quarter from 9.5% in the second quarter and 9.7% in the first quarter. That sparked a deep sell-off - for a while, until buyers came rushing in.
That doesn't mean gold can't go lower. Sure it can. But I think it will find even more buying at lower levels.
Reason #3: China & India Are More Bullish on Gold Than Ever
Last month we got news that China's investment demand for gold surged 70% in 2010 to an all-time high of 187 metric tonnes. This year, China's gold dealers and analysts are reporting even heavier volume.
China's "investment demand has picked up exponentially," Albert Cheng, the Far East managing director at the World Gold Council, told reporters in Montreal "The financial crisis has triggered people to be cautious of anything they don't understand," boosting demand for bullion as an alternative asset.
Meanwhile, India, the world's other big market for gold, saw demand for gold bars, coins and other pure investments soar 83% year over year in 2010 to 349 metric tonnes, according to precious metals consultancy GFMS. Gold used for jewelry rose 36% to 685 tonnes in 2010. Investment demand accounted for 34% of total buying, up from 28% in 2009. As for this year? Well, it's festival season in India, the time of peak gold buying, and analysts are looking for a big jump in Indian gold demand.
Reason #4: Miners and Explorers Are Cheap
Gold miners pulled back along with gold. But the real carnage was in the explorers and developers, who have been crushed. The chart below from Capital IQ and TD Securities shows gold miners by market capitalization and their returns since April 2011.
You can see that explorers and developers have declined the most, losing 21%. Small- and mid-cap producers have declined 6% and large producers lost 5%.
Meanwhile, the price-to-net asset value for exploration and production companies are near record lows. So that means there are bargains to be found in those beaten-down stocks, especially if gold is going higher.
In fact, TD Securities reported that gold equities outperformed gold in seven of the last 10 rallies.
In sum, my outlook on gold is very bullish. So today, I'm going to give you three ways to play the next move in gold - a move that could easily take the yellow metal to $2,400 an ounce ...
#1) An ETF That Holds Physical Gold
There are many of these now. While I like owning the real deal for the long-term, there's nothing wrong with using a gold ETF for a trade. These funds are very similar, and there are many you can choose from. The SPDR Gold Shares (GLD) is by far the most popular gold ETF. GLD has total assets of around $52 billion. The fund trades more than 13 million shares daily. The price of one share of GLD is approximately 1/10 the price of one ounce of gold, less expenses and fees. The fund has an expense ratio of 0.40%.
#2) An ETF That Holds Miners
The big miners, including Barrick, Goldcorp and Newmont, all look very attractive right now. And individual names hold the potential for real outperformance. But if you're not the kind of investor who is going to do a lot of research and watch your investments carefully, it might be better just to buy an ETF that holds a handful of the biggest miners. The largest one is the Market Vectors Gold Miners ETF (GDX) which has an expense ratio of 0.53%.
#3) A Gold Explorer
This is really ratcheting up the risk and reward, so it's not for everyone. But I'm putting subscribers to my Red-Hot Global Resources into small explorers with powerhouse potential.
One example of my recent recommendations is Rye Patch Gold (RPM on the TSX-V, RPMGF on the US OTCBB).
Rye Patch has properties along rich gold trends spread across roughly 33 square miles in Nevada, and its drilling program is racking up millions of ounces in resources. So far, the company has 3.1 million ounces of gold and 40.3 million ounces of silver (for a total of 3.91 million ounces gold equivalent), all NI43-101 compliant.
Or putting it another way, Rye Patch has 1.2 million ounces of gold and gold equivalent in the measured and indicated category, plus 2.7 million ounces of gold and gold equivalent in the inferred category.
Oh, and I should mention that some of Rye Patch's core samples from one of its properties contain visible gold - as seen in the picture on the right.
I recently went on a tour of Rye Patch's properties, a tour led by William Howald, the company's president and CEO.
Bill's history includes a long stint as general manager of exploration, United States and Latin America, for Placer Dome Inc. Important projects he has lead teams for at Placer Dome are in this corner of Nevada, and are now producing mines for other companies.
Mr. Howald's team delivered over 80 million ounces of gold resources to the portfolios of Placer Dome, Barrick, Agnico Eagle and others. Operating mines include Pipeline, Turquoise Ridge, and Bald Mountain Mines in Nevada, and Puren in Chile. His team also delivered new gold ounces at Pueblo Viejo in the Dominican Republic and Cortez Hills in Nevada.
Considering Mr. Howald's intensive knowledge of the area and his years of experience in just these kinds of systems, there is probably no one better qualified to find you a commercially feasible gold and silver resource in Nevada.
In a video made by Rye Patch shareholder Jim Richmond, Bill Howald describes his Nevada team as his "dream team." You can watch it here.
And Mr. Howald gives an overview of the company here.
The team is just one of the reasons why I thought Rye Patch was worth recommending to my Red-Hot Global Resources subscribers. There are also important caveats you should be aware of: I have NOT given you enough information today for you to make an informed decision about Rye Patch.
I would recommend that, before taking the plunge, potential buyers of this stock read Red-Hot Global Resources issue #106. You can get your copy, risk-free. Or do your own due diligence. And know the conditions that will cause you to sell before you buy.
This is a tricky, even treacherous market. But precious metals are one of the places where I can invest and still sleep at night. If you came into this week finding your precious metals portfolio light, start thinking about what you might want to buy. Prices could get cheaper, but they could also get more expensive. And all the while, the irresistible, long-term forces driving gold higher continue to pile up.
The next move higher might not only be big. It might be one for the record books.
Yours for trading profits,
Sean Brodrick is a natural resources expert and editor of Global Resource Hunter, a monthly newsletter designed to help investors ride the commodity supercycle - an ongoing surge in price of food, energy, metals and more. Sean is also the editor of Red-Hot Global Resources, a weekly newsletter that aims to help investors rack up profits with commodity-focused exchange-traded funds (ETFs) and natural resource-sensitive stocks that operate around the world. He will talk on Sunday, Nov. 27, during the San Francisco Hard Assets Investment Conference.