Gold, Silver and Copper: What We Can Expect From these Precious Metals Stocks

Gold, Silver and Copper: What We Can Expect From these Precious Metals Stocks

Even if the Fed doesn’t move ’til the third quarter, the market is already rallying in anticipation.

But don’t forget this is a US election year. Obama wants to get re-elected in November. If the Fed wants to see this happen, it will be motivated to start pulling the levers in an attempt to bring down unemployment. This takes many months, so the Fed would need to act sooner rather than later, which probably means at least announcing QE3 early in the second quarter.

Precious metal markets didn’t miss the news last night.

Gold jumped 1.8%, and is now sitting above the 200-day moving average again (red line). I must admit, I think these lines are all a bit hocus pocus. But you would do well to watch them because so many others follow them religiously.

Gold Back in the Zone

Gold Back in the Zone

Source: stockcharts

Some good mates in the markets have been calling me recently doubting their bullish views on gold. My reply has been the fundamentals haven’t changed, just the market’s conviction; and historically that combination has been a good time to buy.

Now we have Uncle Ben talking about more QE. The last few doses of his medicine started big rallies in the gold price, and I think we are about to see a repeat of history.

So gold stocks broke out of their funk last night too. The prospect of higher gold prices, and the next dose of liquidity, pushed them higher. The gold producer index, GDX, climbed 1.7%. The gold junior index, GDXJ, which represents the riskier variety of gold stock, jumped 4.13%.

But silver was the best performing commodity on last night’s news, gaining 2.1%. The silver miners ETF, SIL, gained 1.9%. Things have been quite boring on the silver front over the last six months. But things suddenly look much more interesting. The chart certainly looks better.

Silver Coming Back to Life

Silver Coming Back to Life

Source: stockcharts

So I think the second quarter of 2012 looks good for gold and silver stocks. I also think oil and gas stocks should keep up the great run they have had so far this year, as I wrote yesterday.

But let’s not get carried away. There are plenty of risks out there still.

How about the risk of war between Israel and Iran?

This is a very real proposition, particularly since Israel’s ministers recently voted in favour of attacking Iran. This is probably the biggest risk hanging over the market right now, and yet there is very little talk about it. I’m keeping a close watch on this for readers.

However, if conflict between these two nations breaks out, gold, silver and oil are exactly where you want to be sitting. These could be the only parts of the entire stock market to benefit. Precious metals will soar on fear, and oil will soar on falling exports as the world’s biggest exporters in the region waste time dodging bullets.

Investing in actual bullion is the most direct way to protect yourself from this. As for oil, you can invest in the ‘black gold’ directly on the ASX. This is via an exchange traded fund with the easy to remember code, OOO. Investing in precious metals or oil stocks is a higher risk, but possibly higher return option.

The other big risk we can see in the second quarter is that the markets will be busy watching for more signs of a slowdown from China. The market had kittens a few weeks ago when China announced its new growth target is 7.5%, instead of 8.0%.

Where to Start?

Firstly China told us about this last year in its five-year plan, so why the market had a nervous breakdown on the news a few weeks ago is hard to fathom. And besides, 7.5% is still an incredibly fast rate of growth.

Then consider that when your economy has grown 30% in the last few years, 7.5% is the same amount of growth in absolute terms that 10% growth used to represent. So it would need a comparable amount of raw materials.

And finally, this is a chart I sent D&D readers a few weeks ago. It shows how the old target of 8% was realistically a floor for the growth rate, not a ceiling. With a target of 8%, the last reported rate was 9.8%.

China’s ‘Target of 8%’ Was a Floor, Not a Ceiling

China's 'Target of 8%' Was a Floor, Not a Ceiling

Source: tradingeconomics

So if the new target is 7.5%, then perhaps expect this year to be in the 9-9 .5% range. And that is supersonic by any measure.

Bullish On China

I know. My bullish take on China puts me at odds with your regular editors! But different opinions are what makes a market. And this brings me to a prediction that would really clash with your regular editors:

The copper price is about to start rallying again.

After dropping over the last 12 months, and flat-lining for the last few months, I think copper is getting ready to start climbing again.

I tipped a copper stock two years ago the last time I felt like this. I raised a few eyebrows in the office, but that stock is now up 150% since then.

The markets missed it recently, but China is planning to seriously increase its stock of public housing. And if there is one thing that drives copper demand it is Chinese construction. Plumbing and wiring take up tonnes of the stuff. China is the world’s biggest copper consumer, so this new policy will have a big effect on the market.

You can see this in the spare copper inventory on the London Metals exchange, which has plummeted by 30% in the last few months. This is often a sign to get ready for a rally. Global copper supply has not improved in the last few years. There just aren’t any new big projects coming on line! The copper chart looks pretty good too:

Copper Steadying For its Next Leg Up?

Copper Steadying For its Next Leg Up?

Source: Stockcharts

So, precious metals stocks are always on the menu, and I will be adding oil stocks too. But the surprise is that I may well be trawling around for more copper stocks for Diggers and Drillers in the second quarter.

But of course, we still have to navigate our way through whatever other unexpected twists and turns are in store.

I’ve listed a few ‘known risks’ to watch for. But we also have to dodge the ‘known unknowns’!

As long as we also price in the ‘unknown unknowns’, we’ll be safe as houses!

Dr. Alex Cowie
Editor, Diggers & Drillers

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