Gold and Silver to the Rescue

 | Aug 03, 2011 | 9:37 AM EDT  | Comments
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Another round of quantitative easing might not have been on the Fed's mind two or three months ago, but it has to be now in light of recent economic data. A perfect storm of weak data has fueled a fair amount of institutional selling in the major averages in recent weeks -- a risky environment for stocks, indeed.

Clearly, the market's concern isn't the U.S. debt ceiling, or the eurozone debt crisis, for that matter. The market's focus is solely on the U.S. economy and the increasing possibility of a double-dip recession.

Last week, the first estimate to second-quarter GDP came in at 1.3%, below the consensus estimate of 1.7%. To make matters worse, first-quarter growth was revised lower to 0.4%. Yes, the economy almost contracted in the first quarter.

On Monday, the Institute for Supply Management's (ISM) manufacturing index fell more than expected. On Tuesday, consumer spending fell for the first time in nearly two years. Oh yeah, and July's employment report looms large Friday. The way the stock market's been trading lately, it seems to be pricing in a bad number. Non-farm payrolls are expected to rise by 84,000 after paltry job growth of 18,000 in June.

Heightened uncertainty about the health of the U.S. economy has sent bond prices soaring and increased investors' appetite for gold and silver.

On Tuesday, December gold closed at $1,644.50 an ounce, up $22.80, or 1.4%. Silver, meanwhile, added 2% to $40.09 per ounce. On Monday, the SPDR Gold Trust (GLD) added 2.4% to $161.52 in heavy volume, while iShares Silver Trust (SLV) added 4% to $39.82.

I like SLV better for a trade than GLD. That's because GLD is too extended after recently clearing a buying area of $151.86, its intraday high on June 22. On the other hand, I wouldn't be surprised to see SLV try for a breakout over $40.35, its July 27 intraday high.

In terms of individual names in the silver space, First Majestic Silver (AG) is my favorite due to outstanding fundamentals and a solid chart. The company operates silver mines in Mexico. I did a One-Minute Trade video on the company in February when it was trading around $15. It ran up to a high of $26.88 on April 6 before settling into a new base.

In early July, the company said it produced 1.8 million equivalent ounces of silver in the second quarter, an 11% increase from the year-ago quarter.

First Majestic has set up nicely for a potential second-stage base breakout over $25.56. I would only be a buyer on breakout over this price level in heavy volume.

The company hasn't announced an earnings date yet, but it should be in two to three weeks. The company shows excellent bottom-line and top-line growth in recent quarters. In the first quarter, the company earned $0.23 a share, a 2200% increase from $0.01 earned in the year-ago period. Sales more than tripled to $55.3 million. Profit and sales estimates aren't available for the second quarter, but full-year profit in 2011 is expected to more than triple, to $1.14 a share. Shares closed Tuesday at $23.86, up 6%.

In terms of an individual gold stocks, Royal Gold (RGLD) is clearly leader, but it's a bit extended so I'd rather wait for a pullback. The company owns and manages royalty interests in precious-metals mines -- mainly gold and silver -- around the world.

Royal Gold shows exceptional growth in recent quarters and another strong quarter is expected when the company reports earnings on Aug. 11 before the open. The consensus estimate is for profit of $0.40 a share, a 90% increase from a year ago with sales up 46% to $59.3 million. Royal Gold sells at 60x trailing earnings and 37x forward. It's still selling below its growth rate, though, as full-year profit is expected to rise 52% this year and 40% in 2012. Shares closed Tuesday at $67.71, up 3.5%.

The stock is a bit extended after recently clearing a buying area around $62.33. A low-volume pullback to the 20-day moving average around $63.95 would be just what the doctor ordered. Its 50-day moving average is around $60.74.

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