3 Pro-Approved Silver and Gold Trades

09/07/2011 7:00 am EST

Focus: STOCKS

Tom O'Brien notes that South Africa-based gold miners, in particular, could be poised for gains because of currency exchange rates. He also says there’s opportunity ahead in silver.

Kate Stalter: Today, we have the pleasure of being joined by Tom O’Brien, who has coached and educated countless investors through his Tiger Financial News Network, better known perhaps as TFNN. He has newsletters that cover the market, technical trading, gold, and a myriad of other topics. He also is the host of the very popular Tom O’Brien radio show, where I have had the privilege of being a guest.

I wanted to start out by asking for some of your views on gold and precious metal these days. You publish a newsletter on that topic, and you do speak frequently on that topic. What do investors need to know right now about gold and other precious metals, and what is their best course of action at the moment?

Tom O’Brien: You know that gold hit a high on August 23. We got up to that price point of $1,917. My take is that we are going to be now building a floor. What gold has done in the past ten years is this: It has built four separate floors. If you are a metal bull, you actually want to see a floor being built, versus a parabolic move.

You know there are plenty of folks out there that want to see gold at $2,500. I suspect gold is going to be at $2,500...I would rather see it at $2,500 a couple of years from now, because anything that goes up too fast or down too fast changes the total trend of the market.

So my take is that you are going to be in a consolidation for quite a bit. The last time we have been in consolidation was from April 2011 to July 2011. The low of that consolidation is probably going to be somewhere around $1,500 or $1,600, which is down quite a bit.

We came off those highs, down $220 in 48 hours. That in itself was saying there are fewer buyers out there; there are more sellers. In this particular case, it wants to be tested. When you have consolidations, they like to be tested. So folks should have some patience.

As you see it come back down to the other side of the consolidation, what you will hear in the marketplace, when it comes back down to the other side is that the gold market is over. That is what you would like to hear to be a buyer. That is the way I am looking at the gold market right now.

Kate Stalter: So it is somewhat of a contrarian point of view perhaps?

Tom O’Brien: Well, it is a contrarian point of view, absolutely, on a fundamental basis. On the technical basis, it’s that we are testing those highs on dramatically less demand, meaning less volume.

So when I see any type of vehicle—meaning an equity, an ETF, or a future—testing highs or lows, but it doesn’t have the same kind of conviction move behind it, that is telling me that it is a test of that area; it will back off from that area once again.

What ends up happening, of course, in investing: if you buy something at the right price, then it is a lot easier to make money. That’s vs. buying something that’s gone from, in gold’s case, up there at $1,900. Well, gold moved nonstop from $1,475 to $1,900. So the question you have to ask yourself: is it going to move from $1,900 to $2,500 right away also?

Kate Stalter: When it comes to investment vehicles that individuals should be researching right now, do you suggest they look at the ETF—the SPDR Gold Trust (GLD) that has done so well, the commodity itself, or maybe some of the miners? What should they be doing?

Tom O’Brien: I trade all of the above. I think the best trades in the market right now, if you want to be in the gold market, and the trades that I am going to give you right now, this will be going on for the next two or three years. You want to be involved with the miners that have a stake in South Africa.

The reason that I am saying that, Kate, is that the gold market, in particular, has everything to do with the currency that the company’s mines are in. You have a lot of these gold companies that are not at highs, and people are saying, “What is wrong? Gold at $1,900 and my company made its high in 2007.”

The problem is that gold companies get paid in US dollars, and their expenses are in the country they are doing business in. So what you have in South Africa now is this: That the rand-dollar has been strong beyond belief, compared to the US dollar. Our US dollar is at 7.469 as we are speaking now.

If in fact, gold pulls back and the dollar goes higher, which I think is going to be happening, gold can pull back $200 or $300. The US dollar goes higher. The rand-dollar is going to get weaker, and that actually puts huge firepower under the South African equities.

And what you have there are the South African companies that have millions of ounces—not hundreds of thousands of ounces—they have millions of ounces of gold.

When gold was trading at $325, Harmony Gold (HMY) and Gold Fields (GFI) were paying dividends. They made more money with gold at $500 than they are making with gold at $1,900, because of the fact that the rand-dollar got so strong. Now the rand-dollar is going the opposite way, meaning it is getting weaker.

Kate Stalter: Okay, so those are a couple. Any other names that perhaps investors should be researching at this time?

Tom O’Brien: Another one if they want to look at the silver market. What is unique about the silver market, of course, is that silver went to all-time highs. The acceleration was dramatic. It came off those highs in April, big time.

I expect, though, that silver is already in the consolidation that it wants to be in. You know, silver is at $42, I think it kind of hit $35 again. But from $35 to $42, silver miners make money hand over fist.

There is a company called Great Panther (GPL). I own Great Panther. I do own the ones I mentioned, I actually own these stocks too.

Great Panther in itself, there is a huge amount of silver. They get silver out of the ground at a very inexpensive price in their backyard, meaning the actual backyard is pretty large.

Great Panther is trading at $3.37; it has gone as high as $5.50. I’m a technical trader, and what I always like to see, Kate, is highs with high volume. That is exactly what Great Panther has. Great Panther hit a high out there of $5.04 in March, and has huge volume.

So markets don’t stop, meaning they are not over when you have a high-volume high. So, from a money-management aspect, that to me is a good trade setup. They make good money.

Of course, you want companies that make good money and can expand; you know, expand those earnings down the road.

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