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How to Trade Precious Metal Stocks Right Now

By Matt Badiali, editor, S&A Resource Report
Thursday, December 10, 2009

When you're sending out your Christmas cards this month, gold and silver stock investors should send one to Beijing.

The people of China have helped gold and silver stock investors (and readers of my S&A Resource Report) make a lot of money this year. And they've helped make several of my predictions turn out right on the money.

Back in June, I wrote a special report, Government-Backed Gold and Silver: How to Make 10-Times Your Money in China. The report focused on how China has gone gold crazy.

Chinese Premier Wen Jiabao started out as a geologist. He knows the value of a domestic gold mining industry and he needs to dump all those dollars. The Chinese government made huge commodity news this fall when reports leaked it was encouraging its citizens to buy gold and silver for a store of wealth. And in just the past few years, China has become the largest gold-producing country on Earth. The Middle Kingdom likes its gold.

One of my recommendations to profit on China's gold rush, China-focused producer Jinshan Gold Mines, is up 143% in less than five months. My June recommendation of a major Chinese silver producer is up over 100% in around the same time.

China also helped fulfill my prediction of a September gold breakout. In my issue that month, I detailed the past three big breakouts in the gold price since the bull market began in 2001. I said the next leg up in gold was coming soon... and it would hold above the $1,000 level. We nailed it almost to the day.

Gold staged an explosive breakout to more than $975 in the first week of September. It's enjoyed a monster $200-an-ounce move up since then. This jump has propelled most of our gold stocks to gains of more than 25% in just three months.

Of course, we can't give 100% credit to China for the big breakout in gold and silver. The rising price of gold involves a lot of moving parts. Developing nations like India are buying "real wealth" in the form of gold to escape the crumbling dollar. Giant investors – like billionaire money manager John Paulson – are buying gold, too.

But I believe the rise of China – and its citizens' knowledge of the safety of gold – is responsible (and will continue to be responsible) for a good portion of gold's rise.

Despite the big rise in gold, I don't think the metal is in a bubble like some analysts believe. My colleague Brian Hunt reminded attendees of our Alliance Conference last month to ask 100 people on the street if they own gold. Some will say they've heard something about gold in the news, but they have no idea what's driving gold higher... and almost none will tell you they actually own bullion.

That's why the latest advice I'm giving S&A Resource Report readers might sound contradictory to some. I have most of my recommended list of gold stocks as holds... and not "best buys." No, I don't think gold or silver is in a bubble. No, gold is not going to crash. I just don't think most gold and silver stocks are great buys right now.

Gold and silver stocks enjoyed a huge run recently. The Gold Miners Fund is up 36% since July. The benchmark for small resource and mining companies – the Canadian Venture Index – has gained 30% since July. I'm not finding incredible values like I did earlier this year.

Gold miners are selling for an average of 35 times future earnings right now. That's too high. I won't pay more than 20 times future earnings, even when the price of gold is on the rise (and it's much better and safer to buy gold miners for five or 10 times earnings).

For example, giant gold miner Goldcorp is a buy below $41 per share – that's about 20 times its 2009 estimated earnings. At around $40 today, it's not super expensive, but it's not a fantastic deal.

Another one to watch is gold royalty company Royal Gold. This is one of my favorite ways to invest in the yellow metal. At today's gold price ($1,125 per ounce), I wouldn't pay more than $49 per share. It's currently up around $51.

Bottom line for gold stock investors: It's been a great year. But all bull markets pull back and return some of their gains. That's what I expect to happen soon... and you'll get another opportunity to set up your portfolio for the next leg up in gold. Be ready. China needs to dump more dollars... and it's going to put many of them in gold.

Good investing,

Matt Badiali

P.S. If you want to know exactly how to position yourself in gold and other natural resources over the coming months – including the big Chinese mining boom – click here.

Market Notes


Today's chart is proof the market likes the "Everybody Wins" health care thesis from our colleague Rob Fannon.

One month ago, we profiled the new uptrend in the IHF. This investment fund is a "one-click" way to invest in the health care industry. From insurers to device makers to pharmacy managers, the IHF gets your money in the health care business.

And just last week, Rob told us why the IHF is rising much faster than the general stock market: Even if the government pressures profit margins, the health care industry will enjoy millions of new customers from health care reform. Those customers won't care a bit about the price tag. After all, their neighbors are picking up the tab. (We consider Rob's essay a "must read.")

This trend is at work below. The IHF is up 21% since July... and sports one of the strongest uptrends in the market right now.

Everybody Wins: IHF and its bull market

In The Daily Crux

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