Gold and Silver: Breakout Buys

08/22/2003 12:00 am EST


Ivan Martchev

Editor, Vital Resource Investor and Global Viewpoints

"Gold is going a lot higher than the current $360 an ounce," says Ivan Martchev, in Personal Finance. "The long-term case for the metal is yet to be appreciated by the mainstream investment crowd. By the time that happens, it will be time to sell out of your gold positions, but we don't see that materializing for at least another five years." Here are some gold picks from Martchev, as well as some other favorites from his co-editors.

"If you're not a risk taker, buy Newmont Mining (NEM NYSE) and American Century Global Gold (BGEIX ). However, in the environment that we envision, the biggest winners won't be the well-known names, but the small, forgotten gold miners. As you might surmise, the smaller gold-mining companies are lot more volatile than the big-name gold producers. For diversification, which is crucial in this sector, buy both the exciting companies below as long-term positions:

"Bema Gold (BGO ASE) is a Canadian gold producer with assets in Russia, South Africa, Chile, and Canada. As with any marginal gold producer, Bema had to close down mines in order to survive when gold was scraping $250 an ounce. But with firms like Bema, there's a combination of newfound leverage to rising prices and restructuring benefits. Costs have come down substantially to the $160 an ounce area from $226 an ounce a couple of years ago. Combine that with the rise in gold prices during the past two years and you have the making of a good recovery for Bema's shares. The company is doubling production for 2003 and plans to increase its projected production even further. That's possible because of its acquisitions and new mine openings, as well as its ability to bring formerly unprofitable mines back online. Although the story may be very exciting, tread lightly in low-priced gold stocks. For aggressive traders only, Bema is a buy below 1.90.

"Another Canadian producer that fits the bill is Glamis Gold (GLG NYSE). Glamis is a much bigger and less leveraged gold producer, but isn't in the first tier of gold producers. Like Bema, Glamis is striving to drive operating costs lower while benefiting from higher gold prices. Operating costs currently average $170 an ounce, but that long-term goal is to drive them below $150 an ounce. That can be a powerful earnings driver with gold trading at or below current levels. Our long-term outlook for gold is to ultimately take out its 1980 high. Buy Glamis below 14."

Elliott Gue also offers some favorite in the gold sector: He says, "Now that gold and silver have come off their lows, it makes sense to have a small amount of your holdings in gold and silver stocks. A lot of stocks in those sectors did nothing for 10 years. Many are now coming back and the charts are looking great. We now recommend a nice size allocation to that sector. Our two favorites are Newmont Mining (NEM NYSE) and Harmony Gold Mining (HMY NYSE). Newmont is a US producer and Harmony is a South African producer. The reason for holding both is that these stocks tend to diverge in performance. Sometimes a South African producer will outperform a US producer; other times it flips. Thus, we recommend diversifying between both."

Yiannis Mostrous, co-editor at Wall Street Winners adds, "Precious metals and related mining companies have the most compelling long-term charts right now. Technicians will tell you that the longer a stock or commodity bases, the more significant the ensuing rally will be. The huge decade-plus long bases in the metals means that the rally will last for years and will be very powerful. Gold has shown classic technical action over the past year, suggesting the base is sound. The minimum measuring implication for this base is about $470 an ounce, well above the mid-1990s highs. This target is simply a minimum and we're looking for a move well above $500. Silver's chart pattern is less obvious but just as bullish. For most of the decade, silver has just traded sideways in a narrow range of $4.25 to $5.50. It's hard to find a longer, flatter base pattern. Bases of this type tend to produce huge explosions in volatility and big moves once broken. This looks like the first step for a move above $5.50 and a break of the long consolidation. To take advantage of a breakout, we are introducing a silver play in the portfolio. Compania de MinasBuenaventura (BVN NYSE), a Peruvian mining company, is our pick. We'll look to scale into positions, so don't rush into buying. Deploy only a small portion of your funds, buying under $40."

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