Gold stocks on the move

With risk aversion rising again, investors are quietly moving back into precious metals.

By Anthony Mirhaydari Feb 3, 2011 6:57PM

After spending the past four months sliding, precious metals are attracting investor interest once more. That's a big deal, as between November and January, gold prices formed a "triple-top" pattern after repeatedly being pushed back from resistance near $1,430 an ounce. That, the chartists say, pointed to certain doom for the yellow metal.


But with political unrest spewing forth in Egypt and Tunisia, inflationary pressures rising and renewed concerns about the viability of the U.S. government's tenable fiscal positions and the economic penalty we'll all pay to solve it, precious metals and the stocks of the companies that pull them out of the earth are pushing higher.


Over the past two weeks, gold futures are up more than 3.5%, silver futures are up nearly 9.7%, the Market Vectors Gold Miners ETF (GDX) is up 7.7% and the Global X Silver Miners ETF (SIL) is up 15.8%. Can the gains continue?



The first thing you need to know is that while precious metals have demand fundamentals driven by jewelry and industrial uses, the big swing factor is investment demand, especially via easy-to-trade ETFs like the Gold SPDR (GLD) and theiShares Silver Trust (SLV). These flows started to abate in October.



You can see this in the chart above, which compares the amount of investor cash in GLD vs. the ETF's trading price. Early last year, as the eurozone debt crisis went nuclear and economists started to worry about a double-dip recession, investors moved into GLD and other precious-metals investments for safety. Over the past few months, those flows have reversed as investors seek out riskier assets -- including industrial commodities like copper and energy stocks -- on signs of an improving economy.


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But now, with small-cap stocks moving lower, emerging-market equities on the slide and the CBOE Volatility Index ($VIX) moving higher as Wall Street insiders fret over potential stock market losses, gold prices are rebounding. I expect this to be reflected in a rebound in GLD assets in the weeks to come as the data are released.


All of this is happening right on schedule, according to the cycle work of Tom McClellan of the McClellan Market Report. We're nearing an important 13 1/2 month cycle low for gold. Although such cycles aren't exact, they seem to be able to call the big turns in precious metals. The last 12 1/2 month low arrived a month late in February 2010, just before the Greek debt crisis caused haven assets like gold and the U.S. dollar to surge.


With investor sentiment so high, the subject of my column last week, I think we're poised for another surge in gold as the market gods put some fear back into the hearts of complacent and overconfident traders.


I don't know what the catalyst will be -- maybe Portugal will be forced into the arms of an EU-IMF bailout as its borrowing costs continue to flirt with crisis level highs. But for now, I'm recommending my newsletter clients increase their exposure to gold and gold stocks like Allied Nevada Gold Corp. (ANV) -- which gained nearly 4% today.


Disclosure: Anthony does not own or control a position in any of the companies or funds mentioned. He has recommended SIL and ANV to his newsletter subscribers.


Be sure to check out Anthony's new investment advisory service, The Edge. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up.

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