Digging for Gold Small-Caps

 | Mar 28, 2012 | 12:30 PM EDT  | Comments
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With central banks injecting liquidity into global markets, many analysts are forecasting that gold will continue its long-term bull run that began in the last decade.

But at the moment, the SPDR Gold Shares ETF (GLD) is consolidating below its September all-time high. That's one example of the overall malaise that's hit the metals trade in recent months.

Many investors jumped on the ride as gold mining stocks rallied higher in the summer and early autumn of 2011. But that subset of the metals trade was mired in weakness since many of the individual stocks peaked in September.

Newmont Mining (NEM) is an example of a large-cap miner trending lower, despite bullish remarks about the price of gold from the company's CEO earlier this week.

These days, plenty of advisors are recommending that investors who want exposure to gold either hold bullion or put money into the GLD. Certainly recent performance of last year's large- and mid-cap mining winners has taken many investors out of that trade. Not only is Newmont trending downward, but former price gainers such as Yamana Gold (AUY), Eldorado Gold (EGO) and Randgold (GOLD) are either dropping or going nowhere fast.

But there are some small-cap mining stocks that appear to be etching the beginnings of potentially constructive trends. Gold Resources (GORO) is a fairly recent IPO, debuting in Sept. 2010. The Colorado-based company specializes in exploration and development of gold and silver mining opportunities in Mexico. It has a market cap of about $1.3 billion and it trades around 138,000 shares a day, putting it in the ranks of thinly-traded names.

The company swung into profitability last year and earnings are expected to rise 159% this year to $2.75 per share. The stock has been forming a potential base since February, finding good support at its 200-day moving average.

I'd like to see volume pick up as the stock travels higher. Currently, there is a potential swing point above $26.73, so that's the next crucial juncture I will be watching. Be aware that the stock, like many thinner names, has a relatively high beta. That indicates that it could be prone to wide price fluctuations and, indeed, that's been the case. Gold Resources could be a stock that requires some extra patience -- along with close management -- to hold.

Another small name from the mining subsector is DRDGold (DRD), a South African company that explores for yellow metal in its home country. This is a very small outfit, with a market cap of $277 million and an average trading volume of 99,000 shares a day.

The company has been profitable since 2007, but at erratic rates. Revenue has been trending lower in recent quarters. Nonetheless, for traders with a high risk tolerance, the chart shows some tenuous support at its 10-week line. I say tenuous because the stock plunged below that key support last week and, as of Tuesday, was nestled about 1% above that level, closing at $7.36 on the session.

The current buy point is at $8.16, particularly if heavy volume accompanies a move above that price. But there's potential for an earlier entry, for example if the 10-day moving average crosses back above the 20-day.

At the moment, there's plenty of debate among market analysts and technicians as to the metals trade. In particular, the miners have been lagging, so many have written off that trade.

But some investors view gold as yesterday's trade and have moved on to other sector.

"Gold and Silver have topped for good and have begun what will become a multi-year, if not decade bear market," Gennady Kupershteyn, portfolio advisor and independent trader, said.

Keprshteyn pointed to Jesse Livermore, the early 20th-century investor known for his early writings on trend following and market timing concepts that are utilized today.

"Jesse Livermore said that when the shoeshine boy is giving you advice, it is time to sell," he said. "Today's version of the shoeshine boy is the mall kiosk where you can buy gold and silver bars."

Kupershteyn predicts Fed actions will continue to cause intermediate rallies in precious metals over the coming years "but the overall trend will be down."

For those who don't have confidence in the longer-term prospects of precious-metals-related plays, there could still be short-term trades that yield gains. But when it comes to the miners, the big names of 2010 and 2011 are not showing leadership at the moment and small, thinly-traded stocks, as always, require extra caution if a trader is to pocket gains and not get shaken out.  

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