Gold Stocks Outperforming Gold Itself

10/07/2010 12:01 am EST

Focus: COMMODITIES

A month ago, I wrote here on MoneyShow.com saying that traders would be wise to wait for a breakout of gold above $1,269 before initiating any new long positions. Well, the break happened, followed by a successful retest of support, and it now appears as if $1,350 is well within reach in the next few sessions.


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Mining Stocks Continue to Excel

As impressive as physical gold‘s price appreciation has been since bottoming in October 2008 (it’s up nearly 100% in less than two years), the increases in certain precious metals mining stocks has been breathtaking. Look at a chart of Tanzanian Royalty Exploration Corp. (TRE) over the same 23-month time period – it’s gone from $1.58 all the way to $7.35 (as I write this). That’s an increase of 365%, more than three times the price appreciation of gold itself! There are plenty of other precious metal mining stocks with returns far in excess of the price of gold, such as Almaden Minerals Ltd. (AAU), which went from $.33 per share in November 2008 to $3.19 as of today. That’s 866% in less than 23 months.

Granted, putting your life savings into a penny stock at the bottom of a major precious metals market correction isn’t an advised course of action, but even a 1,000 share investment in AAU would have provided very handsome returns with only $330 at risk (plus commissions). As you glance at the Metastock exploration above (which highlights the strongest precious metals mining stocks versus the price of gold itself over the past 13 weeks), you can get a better sense of the relative price appreciation among junior and senior precious metal miners and the pure exploration and/or royalty plays.

Juniors and Seniors

Generally speaking, the smaller cap, speculative issues have profited the most, but a wise metal stock speculator/investor would still want to have a good deal of exposure to the heavies in the industry, names like Newmont (NEM), Agnico-Eagle (AEM), Silver Wheaton (SLW), and Randgold (GOLD), among others. If you believe that this gold bull market still has room to run, here’s a suggestion for you: Start compiling a shopping list of fundamentally attractive gold and silver stocks (and maybe a few copper producers too, for good measure) that may be suitable for acquisition on the next corrective move lower in the gold and silver markets. I personally use the stock rating system at Zacks research, but there are a few other good services available to help you rank the earnings growth potential of your favorite large and small cap mining stocks.

Patience May Pay Off

When the correction comes (and it may be larger than anticipated, especially with bullish metals fever running wild now) you’ll be patiently waiting with cash in one hand and your shopping list in the other hand. Of course you need to know how to read the charts to alert you to the most opportune time to start buying again (since you’re already a reader of MoneyShow.com, you should already have a good idea how to do that anyway), slowly scaling in to new positions, perhaps one or two at a time with a fractional allocation of your investment cash into each one.

Many technicians anticipate a “healthy” correction in the gold and silver markets, and with a ten-year bull market already fixed in place, it’s also very possible that the rally back up from such a correction will still have plenty of firepower beneath it, possibly driving the prices of gold, silver, and the entire precious metals mining stock complex up to new highs with it. So, start getting that shopping list ready… you never know just how soon you may need it.

By Don Pendergast of ChartW59.com

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