The rally in precious metals is leading to massive takeover
speculation in gold and silver mining companies.
All media outlets are talking about it. And analyst price
targets on gold are now pushing $1,500 within the next 12-months.
The fact that gold is up around 20 percent so far in 2010 and is
poised to make its tenth consecutive annual gain only appears to be
adding fuel to the rally.
And silver has pushed nearly 30 percent higher this year too -
the 'poor man's gold' is set to post gains for the seventh
consecutive quarter. If it does, it would be the best streak for
silver since 1974.
The million dollar question is clear - should you believe this
rally and buy at these levels?
Nobody wants to be the last one to the party, putting capital to
work right when the 'smart money' starts to head for the exits.
My short answer is simple. I believe gold and silver both have
room to run from here. But that doesn't mean you run blindly into
gold and silver stocks on the assumption that all will rise
And it also doesn't mean that gold, and mining stocks, can't
pull-back significantly from current levels. The five year chart of
gold below shows that yesterday's close of $1,380 is pushing the
upper end of a fairly well established channel. The relative
strength indicator (RSI) is also showing that gold could be getting
extended at current levels. Of course, trading ranges are broken
all the time, so there are no hard and fast rules here.
Based on RSI silver is also starting to look a bit extended near
$22. The recent dramatic spike higher from $18 was nothing short of
spectacular, but in my opinion was more about silver 'catching up'
with gold than an independent move. Silver around $18 was too cheap
by historical standards.
To get a better picture of where these too metals are we need to
compare them to each other. Check out the gold:silver ratio over
the last ten years and you can see exactly what I mean. The ratio
has finally touched 60 again, a level it hasn't seen since late
2009. This ratio divides the price of silver into the price of gold
and gives investors an idea of the relative value of these two
The long-term historical average gold:silver ratio is closer to
55, indicating that silver still has room to run (or that gold
should fall from here, all else being equal).
What you'll also notice if you analyze the time periods in the
above chart, is that the gold:silver ratio tends to rise in periods
when market risk elevates, such as in the years around the dot.com
bubble and the most recent financial crisis.
In periods of sustained and relatively stable economic growth,
the ratio tends to be lower. Remember that this ratio is giving us
the relative value of silver and gold, so when the ratio is higher
that means gold is more expensive relative to silver. And
conversely, when the ratio is lower silver is more expensive
relative to gold.
***Right now one of the catalysts pushing gold higher is
investor demand for a safe haven asset. Typically gold is purchased
as an inflation hedge, and with monetary stimulus still on the
Fed's menu, the consensus seems to be that gold is the place to
With an uncertain outlook for the U.S. economy, silver is stuck
in the middle. It tends to rise in price with economic growth and
stability, but fall when market risk rises. Right now, investors
don't know which is more likely.
So what to do? Again, the answer is simple: stay the course.
I've said over and over that small cap investors should have
exposure to both gold and silver mining stocks for all of the above
reasons. Buy both on the dips, and make sure to invest in the best
companies that are already in production and with significant
Right now these stocks are rallying. Takeover speculation is
rampant, and prices are rallying. I think we'll see a pullback
soon, and that will be a great time to add another miner, or
increase exposure to one that you already own.
Be patient, and don't get too caught up in the hype.
Small Cap Investor PRO
readers to my favorite gold and silver mining companies months ago.
Right now we're up 34 percent and 17 percent on these two stocks,
respectively, and subscribers have been able to add to their
positions on the dips.
Both are takeover candidates, and one is actively looking to
buying another mining company. I can't tell you exactly how things
will work out, but I can let you know when the right time to buy
shares is. You can learn more about these companies by
Where do you see silver and gold prices going in the future? Let
me know by sending an email to: