Taking a Shine to Juniors

07/06/2009 4:24 pm EST

Focus: STOCKS

Curtis Hesler

Editor, Professional Timing Service

Curtis Hesler, editor of Professional Timing Service, anticipates a golden opportunity in some of the smaller precious-metal miners.

My work suggests that gold should make one more dip toward the $900 [per-ounce] level and then make a run at $1,000. I believe this time it will break through. I am seeing some encouraging technical action in some of the juniors on our list. For example, US Gold Corporation (NYSE: UXG) has improved recently, and it is making some nice upside jumps on volume. Other juniors are also acting much better.

Gold breaking over $1,000 is the key to the juniors. It is time to begin accumulating these little gems again. It has been a tough go over the last year, but they will have their day once more. Be prudent. The juniors are riskier than the major producers. They are more likely to have surprise events, both good and bad. Nevertheless, they look to me to be better gambles on the future price of gold than call options.

The gold/XAU ratio measures the relative difference between bullion and the average mining share represented by the XAU, or Philadelphia Gold and Silver Index. Historically, this ratio has not moved much over 5.50. Readings over 5.00 in the past have been an indication that the mining stocks were too cheap and should be bought. The liquidity panic of 2008 had folks selling anything and everything, regardless of value, in order to raise cash. The mining shares were not excepted, and they were sold off to the point that the ratio hit 11.00 at one point. As the juniors are beginning to perk up, the ratio is still sitting over 6.00. Bottom line, mining shares continue to be undervalued compared to bullion.

I think we will see one more shot at $900 gold basis December over the next couple of weeks, and the 12-week cyclical low is due soon. The dollar could have a brief rally here; but longer term, it’s teetering on the edge of a cliff. I believe we will make money going forward in our precious metals shares, and further weakness will provide an extraordinary buying opportunity.

One [potential target] is the Spyder Gold Trust ETF (NYSE: GLD). I am adjusting the buy price up to $89. Don’t lose sight of Royal Gold (OTC: RGLD). I lowered the buy price in the last letter to $38, and we have not hit that price yet. However, the gold stocks can be rather volatile, and $38 is well within range. Be patient. Royal Gold earns [its] money investing in gold royalties, so the stock can be more volatile than most. Also, it will often turn before the rest of the gold shares, and it is an interesting leading indicator.

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