Two Stocks for a Gold Turnaround

09/11/2008 12:00 am EST

Focus: STOCKS

Michael Brush

Columnist, MSN Money

Michael Brush of MSN Money says the yellow metal may be poised for a rebound, and he finds two potential winners.

Gold bugs have seen their precious metal tarnish this summer.

Devotees of the yellow metal have watched in horror as gold has slumped [over 20%] to $760 an ounce.

[But] despite this pullback, the fundamentals that drove gold higher haven't changed.

The near-term catalyst for the next move up could be as simple as holidays that call for giving gold as a gift, including Diwali (the Hindu "Festival of Light"), Christmas, and the Chinese new year. 

The reason demand for gold jewelry can have an impact on prices is that supply and demand are already tight.

Meanwhile, demand for gold as an investment has stepped up over the past few years because of the creation of gold ETFs. Gold ETFs were recently backed by about 930 tons of bullion, according to Tocqueville Asset Management.

[But] the world will see an overall shortfall of 300 tons [of  bullion], predicts Lehman Bros. analyst Peter Ward. He's projecting even bigger shortfalls for 2009 through 2012.

Typically, when sentiment gets overly bearish on an investment, that's when it is hitting bottom and about to reverse. We are probably there now with gold. Investments in the Rydex Precious Metals Fund (RYZCX) recently dropped to lows not seen in three years, points out Jason Goepfert of SentimenTrader.com.

One problem with calling a rebound right now is that the dollar has been strong lately, which is typically bad for gold. James Paulsen, the chief investment strategist at Wells Capital Management, agrees that the dollar will continue to see strength against developed countries' currencies.

However, Paulsen thinks the dollar will keep losing ground against the currencies of developing countries such as China, Mexico, India, and Russia. This would to make gold look cheaper to buyers in developing countries, even as the dollar gains ground against developed-world currencies.

All of this should help the following stocks move up 50% to 100% over the next six to 12 months:

  • Agnico-Eagle Mines (NYSE: AEM) operates in politically safe countries like Canada and Finland. Its huge LaRonde mine in Quebec and five development projects should support an advance in the stock to $82 in 12 to 18 months, says CIBC World Markets analyst Barry Cooper. (It closed above $46 Wednesday—Editor.)
  • Freeport-McMoRan Copper & Gold (NYSE: FCX) is nowhere near a pure gold play because it gets so much of its revenue from producing copper, but it’s my favorite play on a gold and commodities rebound. The company's recent acquisition of Phelps Dodge adds growth. Plus, the stock looks cheap, and insiders just bought a boatload on the pullback. Lehman’s Peter Ward has a $200 price target on the stock, which recently traded [above $69].
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