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Skarica: Buy Gold Stocks, Especially Small Mining Companies

By Forrest Jones and Ashley Martella   |   Thursday, 13 Oct 2011 01:00 PM

Gold prices have surged during the past few years and will continue climbing, but stocks in the companies that actually mine the precious metal are due for an even stronger rise, says David Skarica, editor of the Gold Stock Adviser newsletter and author of "The Great Super Cycle."

Gold bullion prices have made big gains recently on fears that loose monetary policies are cheapening paper currencies worldwide and will fuel inflation, which makes gold an attractive hedge.

But stock markets have taken a beating, which means the companies that mine the precious metal saw their share prices fall, especially on concerns that a possible default in Greece can send shockwaves through financial systems worldwide.

Sooner or later, Europe will work out its problems and send gold mining stocks making strong gains, Skarica told Newsmax.TV.

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"Bullion is a fear trade, going up faster than the stocks, but at some point I think this is going to reverse, probably when they come to a resolution with the crisis in the European banks," Skarica says. 

When that sigh of relief comes to pass, money will flow into stocks, especially if Europe sticks with loose monetary policy and floods its economy with money post-crisis.

"Right now, I look at these ratios of gold stocks to gold. Those are near all-time lows, telling me that probably in the next two to three years, gold stocks are a better bet than gold bullion."

Keep an eye out for junior mining outfits especially, generally defined as companies with a market capitalization of $500 million or less.

These smaller companies explore for gold often when bigger firms won't — and when they strike it big, they may get snapped up by larger mining companies.

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"Right now, these senior stocks are desperate to add reserves. So they're going to look to the juniors and once you have a find, you become a takeover target," Skarica says.

Gold prices rose to more than $1,900 an ounce recently but have retreated a bit, although the bull run is far from over, he says

Look at the Dow-to-gold ratio for guidance, under which an investor takes the Dow Jones Industrial Average and divides it by the price of gold.

"During the last two major bottoms for the equity market and top for the gold market, that ratio got to 1 to 1, for example in 1980, when gold topped at over $800, the Dow was trading roughly at 800. So it only took one ounce of gold to buy a share of the Dow. Right now with the Dow at roughly 11,000 and gold at roughly $1,600 we are roughly at a 7 to 1 ratio. So that tells me we're nowhere near topping," Skarica says.

That peak could conceivably come when gold hits $10,000 an ounce.

Editor's Note: Get a free copy of David Skarica’s "The Great Super Cycle" — Read More —
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"What I think is going to happen over the next five or 10 years, because of inflation, equity prices in nominal terms won't collapse but gold will go up to protect people against inflation, so they'll meet at around $10,000," he said.

Silver is another asset class that merits attention.

The metal recently traded around $50 an ounce but has since retreated to $30, making it attractive.

Energy and agriculture commodities will remain strong as well, Skarica adds.

Gold prices plunged in September on sentiment that the metal rose too high, prompting investment funds to ditch their positions for cash and jump to the sidelines until markets sail into calmer waters.

Retail investors, however, appear to be hanging on to gold despite talk that hedge funds were ditching it.

That means gold will stay strong, Skarica says.

About David Skarica
David Skarica is a member of the Moneynews Financial Brain Trust. Click Here to read more of his articles. He also writes the Gold Stock Adviser. Discover more by Clicking Here Now.

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