3 Must-Own Precious Metal Plays

Jim Woods's picture

Thursday, August 30, 2012 - 7:30am

by Jim Woods

The equity markets have been relatively quite over the past couple of weeks, no doubt due to the summer lull. But things have been anything but quiet in the precious metals complex, with traders springing into action and buffing up the shine on gold and silver.

In mid-August, gold and silver enjoyed extremely bullish technical events. The SPDR Gold Trust (NYSE: GLD), an exchange-traded fund (ETF) that is a proxy for the spot price of gold, and the iShares Silver Trust (NYSE: SLV), a fund that serves as a proxy for the spot price of silver, each saw their share prices break above their respective 20-day exponential moving averages (EMAs), as well as their 50-day EMAs (see charts below). 

This short-term bullish signal bodes well for a continuation of a run higher in each metal, but that's not the only reason traders should take note and get long precious metals right now. The real reason to get on the bullish bandwagon here also is the reason why traders are getting long -- and it all began last week with the release of the latest minutes of the Federal Reserve's FOMC meeting.

After reading the (mostly dull) minutes from the meeting, one could only reach the conclusion that the Fed believes the weakness in the economy is getting to a point where something needs to be done to stimulate growth. What I couldn't glean from reading the minutes was exactly what that something will be.

The way I see it, we are likely to see one or more of the following moves by the Fed to attempt to keep the economy from grinding to a halt. The first, and least invasive, option would be an extension of the current Zero Interest Rate Policy (ZIRP). The second would be more quantitative easing akin to QE2, i.e., the Fed buying bonds, but at a much less aggressive pace than the previous bond-buying scheme. The third option would be to cut the interest on excess reserves held by banks at the Fed.

The consensus among the traders I trust most, as well as my own read, is that one of these three things will happen in September, and two or possibly all three are likely happen before the end of the year. This, of course, is bullish for gold and precious metals, as more dollars flooding the market via Fed stimulus will continue to cause money to move into hard assets with a vengeance. This is why gold and silver rallied so much last week. It's also why you need to be long gold and silver now.

Of course, the question now becomes what are the best ways to get long on the precious metals QE rally? Both GLD and SLV are solid options. Yet I think there are three other ways traders can get long exposure to the space that offer even more upside than the metals themselves.

1. Market Vectors Gold Miners ETF (NYSE: GDX)

The Market Vectors Gold Miners ETF is a fund that holds the biggest and most-well equipped gold and precious metals mining companies out there. Here we are talking about firms such as Barrick Gold (NYSE: ABX), Goldcorp (NYSE: GG) and Newmont Mining (NYSE: NEM) to name just a few. This fund also saw a big surge through key technical levels last week, and the next stop could be the February highs.

2. Market Vectors Junior Gold Miners ETF (NYSE: GDXJ)
Traders who want even more potential upside from the mining space may want to try the Market Vectors Junior Gold Miners ETF. Like GDX, this fund holds gold and precious metals mining stocks. Unlike GDX, it holds small-cap and midcap mining stocks. These smaller companies are susceptible to bigger price swings than their large brethren; however, they also offer a greater possibility for upside when the bull stampedes through the mining space.

3. Central Fund of Canada (NYSE: CEF)
If you want to go long both gold and silver, then one great, and lesser-known, way to do so is via the Central Fund of Canada. Like the gold and silver ETFs we saw earlier, CEF also has staged a bullish move that's taken it above key technical levels. In fact, last week CEF surged past its long-term, 200-day moving average, a very strong bullish move that augurs well for more upside in the future.

This closed-end mutual fund is one of the easiest, most liquid ways to get long both gold and silver at the same time. This is because CEF holds physical gold and silver in vaults in Canada. Like ETFs, this closed-end fund is traded on the NYSE, so there is never a liquidity issue.

Action to Take -->
I like GDX with a stop-loss at $43.32 and an initial price target of $56 a share.

This article originally appeared on TradingAuthority.com:

3 Must-Own Precious Metal Plays

Jim Woods does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.