Speculating and investing in this sector is difficult. It is a far more difficult industry than others and that is why companies continue to struggle and fail even with the luxury of high metals prices. We’ve written extensively about the recent major bottom in the precious metals sector and the very positive outlook for the equities in 2012 and likely 2013. One can make money if they buy and hold a mutual fund or ETF but they can generate far superior performance with a basket of the right companies. The following explains what we look for in order to uncover the juniors that will deliver outstanding returns.

Capital Structure

Capital structure refers to share structure, market cap and the financial position of the company. First, we want to see a share structure that is low in shares outstanding but also low in its fully diluted count. This means there aren’t tons of options and warrants that can weigh down the stock after it begins a good run. The overall share structure can also be used to grade management. Remember, most of these companies do not make money and there way to raise money is to sell more shares. Compare the achievements of the company with its current share structure. Has the company been productive or has it been ineffective and carries a bloated share structure?

Second and most important, the more cash a company has the better. In looking at non-producers, it is obvious that the companies with significant capital have an advantage over those who have less than $2-3 Million in the bank and may have to finance within the year. For producers, we want to see enough cash flow and capital in the bank that the company can grow its production with minimal dilution.

Projects

In analyzing explorers and developers, we want to find the companies with projects that are likely to become a mine and are likely to be coveted by a large or major company. Consider the location. Is it in a friendly mining jurisdiction like Mexico, Nevada or Quebec? Is the location near an operation of a larger producer or major company? If the answer to both is yes than it is far more likely to become a mine. Also, we want to see projects that not only can be mined but mined profitably. How did the market respond to a preliminary economic assessment? Would the project payback cap-ex in a few years or five? A past producing property is another good sign.

Let me provide an example. We added Trade Winds Ventures to our model portfolio last summer. The stock experienced a deep pullback but had stabilized for a few months. Trade Winds had a deposit literally right next to Detour Gold’s multi-million ounce deposit at Detour Lake. It was a no brainer. This wasn’t a grand slam but it was a very nice return in about five months. The key, which is our next point, is we bought it when it was cheap and not while it was zooming higher in 2010.

Buy Takeover Candidates on the Cheap

This is especially true of the explorers and developers. You are an investor and so are potential acquirers. You both want something that has growth potential at a reasonable price. Like a major company, you will not chase something that has already moved and has little upside from its present market value. Thus, buy these targets cheap. The market is coming out of a major bottom so there should be plenty of candidates. On the first day of the year we added a US-listed development company that we thought was cheap. Technically, it had very little downside. It’s up 25% since then. Had we bought it 12 months ago we’d be down 25%.

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Favor Junior Producers with Development Projects

Juniors who make it to production will do well but it it those juniors that can go from zero or one mine to three or four that will be the biggest winners. We prefer producers but we are looking for those that are likely to have multiple operations. Producers that have strong development projects in the pipeline have advantages over pure development companies and those producers lacking the assets to grow production. For example, our favorite gold stock for the past two years and largest position in the model portfolio is set to put its second mine in production in the coming months and then its third mine into production by the end of 2013.

Find Management Teams with a Track Record

This is especially important if the company wants to be a producer. Mining is an extremely difficult business and therefore your odds of success will be much higher with those who have done it before. Two of our biggest winners, Gold Resource Corp and First Majestic Silver, were led by people who had a great track record. At the same time, the absolute biggest names will command a premium in the market, so be judicious. Management is always important but in building and operating a mine, it is paramount.

Technical Catalyst

Again, for the more speculative non-producing juniors, one should always buy on the cheap or at least buy something that hasn’t made a new high in a year or two. When the market turns favorable, juniors can rebound quickly as we’ve seen. For small producers and development plays we look for a technical catalyst. If the stock is near very strong support then we know the downside is limited and the risk to reward is favorable. If the stock is close to breakout out of a multi-year base then we know it has room to move significantly higher sooner rather than later.

In recent commentaries we’ve told you why you should be buying. This time we tell you what to buy, without actually giving names. Hopefully you can extract a few nuggets from this piece that will serve as a springboard for your research. We are excited because this bull market is going to quietly ramp higher over the next several years. The present is probably your last chance for at least a year or so to buy many companies on the cheap. You can go at it alone or you can consult a professional.

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Jordan@TheDailyGold.com

You have to cross the line just to remember where it lays.”

~ Rise Against. “Satellite” Lyrics ~

Friday morning traders and market participants awaited the key January employment report from the U.S. Bureau of Labor Statistics. The reaction to the supposedly wonderful report was a surge in the S&P 500 E-Mini futures contracts as well as several other key equity index futures.

The overall tenor among the financial punditry was predictable as wildly bullish predictions permeated the morning session on CNBC and in the financial blogosphere. However, after the report had been out for several hours notable independent voices such as Lee Adler of the Wall Street Examiner came out with information that suggested the numbers were an apparition of manipulated statistics.

I am not going to spend a great deal of time discussing the report, but the reaction to the news was decisively bullish on Friday. The question I want to know is whether Friday was a blow off top? In the recent past the S&P 500 has seen several key inflection points and intermediate-term tops form on non-farm payroll monthly announcements.

I follow a variety of indicators to help me decipher more accurately when the market is getting overbought or oversold. For nearly two weeks the market has been extremely overbought, but now we are reaching truly astonishing levels. The following charts represent just a few signals that the market is due for a pullback and a top is likely approaching.

Percentage of NYSE Stocks Trading Above Their 50 Period Moving Average

The chart above clearly illustrates that as of Friday’s closing bell (02/03) over 89% of stocks were trading above their 50 period moving averages. Consequently that reading is one of the highest levels that we have seen in the past 3 years. In addition, over 73% of stocks that trade on the NYSE are currently priced above their longer-term 200 period moving averages. Another extremely overbought signal.

S&P 500 Bullish Percent Index Weekly Chart

The S&P 500 Bullish Percent Index is another great tool for measuring the overall position of the S&P 500. It is without question that the longer term time frame is reaching the highest level of overbought conditions in the past 3 years.

McClellan Oscillator Divergence with S&P 500 Price Action

The two charts shown above present an interesting situation regarding the divergence in the McClellan Oscillator and the price action in the S&P 500. The most recent example of this type of divergence occurred in October of 2011 and prices immediately reversed to the upside after several months of selling pressure. In fact, this correlation between reversals in the S&P 500 and divergences in the McClellan Oscillator works relatively well historically.

Clearly there are bullish voices arguing for the 2011 S&P 500 Index high of 1,370.58 to be taken out to the upside in the near future. Additionally, several market technicians in the blogospere have been pointing to the key resistance range between 1,350 and 1,370 on the S&P 500 as a likely price target. Obviously if those price levels are met strong resistance is likely to present itself. However, as a contrarian trader I have found that the more obvious price levels are the more likely it is that they either will not be tested or they will not offer significant resistance.

It is obvious that Chairman Bernanke and the Federal Reserve have embarked on a massive fiat currency printing campaign which has helped buoy risk assets to the upside. Through a combination of reducing interest rates on safety haven investments like Treasury’s and CD’s, the Federal Reserve has forced conservative investors and those living on a fixed income into riskier assets in search of yield.

This process helps elevate stock prices and creates the desired outcome for the Federal Reserve which involves the perception by average individuals that they are wealthier. The Fed calls this the “wealth effect” and they seem poised to insure that U.S. financial markets continue to ride upon a see of cheap money and liquidity.

Ultimately the Federal Reserve’s most recent announcements have served to help flatten the short end of the yield curve further while providing a launching pad for equities and precious metals. However, issues persisting in Europe could have an adverse impact on the short to intermediate term price action of the U.S. Dollar.

Right now everywhere I look I hear market prognosticators commenting on how hated the U.S. Dollar is and how Chairman Bernanke will not allow the Dollar to appreciate markedly in order to protect U.S. exports and financial markets. I think that the Dollar has the potential to rally in the short to intermediate term. Right now the U.S. Dollar Index appears to be trying to form a bottom.

U.S. Dollar Index Daily Chart

Obviously there is good reason to believe that the U.S. Dollar Index could reverse to the upside here. Whether it would have the strength to take out recent highs is unclear, but a correction to the upside not only seems unexpected by most market participants, but it seems plausible based on the weekend news coming out of Greece.

Monday morning the Greek government is set to determine if they will agree to the demands of the Troika in exchange for the next tranche of bailout funds. If the Greek government and the Troika do not come to an agreement, the Euro could sell-off violently.

Additionally there are already concerns about the next LTRO offering from the European Central Bank. The measure is to help provide European banks with additional liquidity, but there are growing concerns that the size and scope of the LTRO could have a dramatic impact on the Euro’s valuation against other currencies. Time will tell, but there are certainly catalysts which could help drive the U.S. Dollar higher.

Another potential indicator that the Dollar could see higher prices in coming days was the largely unnoticed bearish price action on Friday of precious metals. Both gold and silver have been on a tear higher over the past several weeks. Both precious metals have surged since the Federal Reserve announced that interest rates would remain near zero on the short end of the curve through 2014.

However, on Friday gold and silver were both under extreme selling pressure. The move did not get much attention by the financial media. The price action in gold and silver on Friday could be another indication that the U.S. Dollar is set to rally. The daily chart of gold is shown below.

Gold Futures Daily Chart

Obviously the reversal on Friday in gold futures was sharp. The move represented nearly a 2% decline for the session on the price of gold. However, as long term readers know I am a gold bull. I just do not see how gold and silver do not rally in the intermediate to longer term based on the insane levels of fiat currency printing going on at all of the major central banks around the world. The macro case for gold is very strong, but the short term time frame could reveal a brief pullback.

At this point, I suspect a pullback will present a good buying opportunity for those that are patient. However, I think it is critical to point out that this move in gold on Friday could be a signal that the U.S. Dollar is going to find some short to intermediate term strength. If the Dollar does start to push higher, it will likely put downward pressure on risk assets like equities and oil

While Friday’s price action may not mark a top, nearly every indicator that I follow is screaming that stocks are overbought across all time frames. Pair that with the Greece uncertainty and LTRO considerations and suddenly the Dollar starts to look a bit more attractive. Ultimately I am not going to try to pick a top, but the evidence suggests that it might not be too many days/weeks away.

By: Chris Vermeulen – Free Weekly ETF Reports & Analysis: www.GoldAndOilGuy.com
Co-Author: JW Jones – Free Weekly Options Reports & Analysis: www.Optionnacci.com

Once the stock market begins moving down into its intermediate cycle low it will almost certainly force another rally in the dollar, possibly (probably) back to new 52 week highs. That should, at the very minimum, pressure gold to retest the December lows, and if the selling pressure from the stock market is intense enough we could see another marginal new low somewhere in the high $1400s to low $1500 level.

I should point out that gold still has not broken the pattern of lower lows and lower highs despite the powerful rally out of the December 29 bottom. Technically, gold is still in a down trend. That down trend may be reconfirmed when the stock market drops down into its intermediate degree bottom.

I know we all want gold to immediately return to the days of strong trending moves, long trade durations, and easy money. It’s only natural for investors to long for the good old days. It’s what causes investors to chase (in vain) the last bull market. Think of all the investors that are still chasing the tech bubble of 2000, or the millions of investors still trying to pick the bottom of the housing market, or more recently energy investors struggling to figure out why solar and oil service stocks have underperformed so badly for the last three years.

These are bubbles that have already had their day. They are never going to see those glory days again. Living in the past never made anyone rich. The people that get rich are the ones that figure out early where the next bull market is going to be.

That being said, gold is most certainly not in a bubble yet. But the last massive C-wave obviously topped in September. That was the largest and longest C-wave of this entire secular bull market. Once something like that tops it takes months if not a year or more to consolidate those gains before the next leg up can begin.

Analysts that are predicting $2000 plus gold for this year are just kidding themselves. Gold is almost certainly going to be locked in a very choppy, extended trading range till at least the fall and probably into next spring before the next C-wave can breakout to new highs.

As distasteful as it is, investors need to accept the fact that it’s going to be very hard to make money in the precious metals sector this year, and the only way to do so will continue to be with short-term trading strategies until we have confirmation that the dollar’s three year cycle has topped.

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At the moment precious metal investors have the guillotine of the stock market hanging over them just like everyone else. Historically the selling pressure from an intermediate degree decline in the stock market will force an average decline of about 19% from peak to trough in mining stocks. Right now the mining sector is in a weakened state with the HUI holding below a declining 200 day moving average. That’s not exactly the best position to weather the intense selling pressure generated by an intermediate degree decline in the stock market.

My advice for precious metals investors is the same as it is for everyone else. Go to cash and be prepared to buy when the stock market puts in an intermediate bottom in late February to mid-March.

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GLD had run right up to the top parallel channel trendline before Friday’s dip.

The GDX gold miners ETF 60 min chart closed just at former resistance, now support and the 50 period  EMA for short term if you are long GDX you may want to watch this chart. If it drops under this level, there may be support at the 200 period EMA below

The gold miners mechanical chart remains on a buy though it dipped on Friday. It has good gains since its last buy signal so consider protecting those.

Silver futures had run to and slightly over resistance and backed off. The short term projection level on a move back over takes it to the next resistance which is also a 127.2% rejection.

The silver ETF moved under its 20 period MA and under this short term parallel channel though it has held horizontally.

Gold Report Sign Up Below

02/03/12 Baltimore, Maryland – Dow down slightly yesterday. Oil falling further below $100. And gold still going up.

What is most interesting is the movement in the price of gold. It seems to be heading up again — almost no matter what else is happening.

So, let’s look at what might be going on…

If investors sensed a recovery…they would expect banks to lend more freely…people to shop more freely…and prices to rise.

This would raise consumer prices; the price of gold should go up.

But if the market sees growth and inflation ahead, why is oil slipping? And why is the Baltic Dry Index — which measures shipping prices — at a 25-year low? And how come last month’s employment figures were disappointing? And why aren’t stock market prices going up?

Most important, if the economy is really recovering, why is the 10-year note yielding only 1.82%? And what about the long bond? Shouldn’t it be trading at a yield higher than 3%?

And how come house prices fell over the last year…and the last month?

And how come incomes are falling?

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Or, to look at it from the opposite point of view, how is it possible for a real recovery to take root in the hard, barren soil of falling house prices and slipping consumer earnings?

But if the economy is not improving…then there should be no increase in inflation…and no pressure on the price of gold, right?

Maybe investors don’t anticipate a recovery at all. Maybe they’re buying gold because they see the economy getting worse, not better. We associate a rise in the price of gold with inflation. But gold is much more versatile than we think. It protects your wealth when paper money loses its value. It also protects your wealth when paper money gains in value. It protects you when you are right…and when you are wrong.

How so?

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Between 1980 and 2000, the gold price movement was dominated by the blue triangle (see chart below), whereas a so-called BREAKOUT had already started in 1993 when breaking above the upper-most blue triangle leg at approx. $350 per ounce. For the next six years until 2000, the price did a so-called PULLBACK, which went all the way to the apex of the blue triangle at approx. $250. Thereafter, the so-called THRUST occurred, which is the final movement of a triangular price formation. This thrust to the upside is active ever since as moving healthily along the long-term green upward-channel. Additionally, it is valued strongly bullish when the price succeeds in breaking above the upper-most (green) trend-channel as thereafter, a new mid-termed strong upward-trend is typical.

After the successful breakout above the green (and violet) resistance at approximately $1,300 per ounce in late 2009 to $1,900 in 2011, the price most recently completed a classical pullback to the upper-most green trend-channel at approximately $1,550 – in order to test and confirm this year-long resistance as new long-term support. A sell-signal is not given until breaching this support – hence, a strong and long-termed buy-signal is active at the very moment respectively since holding at the supportive green-violet intersection at approximately $1,550 per ounce.

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Some interesting developments in the efforts by some U.S. states to return to some form of sound money can be found in this CNN/Money story that brings readers up to date in the New Year after a flurry of activity in 2011. Most interesting is the Utah initiative that could be on its way to a real parallel currency to the U.S. dollar.

Utah became the first state to introduce its own alternative currency when Governor Gary Herbert signed a bill into law last March that recognized gold and silver coins issued by the U.S. Mint as an acceptable form of payment. Under the law, the coins — which include American Gold and Silver Eagles — are treated the same as U.S. dollars for tax purposes, eliminating capital gains taxes.

Since the face value of some U.S.-minted gold and silver coins — like the one-ounce, $50 American Gold Eagle coin — is so much less than the metal value (one ounce of gold is now worth more than $1,700), the new law allows the coins to be exchanged at their market value, based on weight and fineness.

“A Utah citizen, for example, could contract with another to sell his car for 10 one-ounce gold coins (approximately $17,000), or an independent contractor could arrange to be compensated in gold coins,” said Rich Danker, a project director at the American Principles Project, a conservative public policy group in Washington, D.C.
…
However, most people aren’t going to walk around with such valuable coins in their pockets, said Vieira. Plus, calculating the value of the coins — especially if they come from different parts of the globe and are of different sizes and shapes — will get tricky. It’s more likely that the states will create electronic depositories and accounts for the coins to make transactions easier, when and if the initial bills are passed, he said.

Utah Gold & Silver Depository is already developing a system where customers could use debit cards linked to their gold holdings. When customers swipe their debit cards to make transactions, physical gold and silver coins would be transferred between accounts in privately-owned depositories (or vaults) based on the market value of the metals.

Of course, the dismal set thinks this idea is nuts, Vanderbilt economics professor David Parsley noting that it’s a “terrible” idea and that proponents of sound money may actually want to “destroy the country”. Yes, economists remain largely out-of-touch with reality…

There is a widening gulf in thinking about money these days and that theme is also clear in Floyd Norris’ New York Times offering In a Focus on Gold, History Repeats Itself.

Gold Report Sign Up Below

– Posted Thursday, 2 February 2012 |

Gold’s London AM fix this morning was USD 1,747.50, EUR 1,326.68, and GBP 1,102.80 per ounce. Yesterday’s AM fix was USD 1,744, EUR 1,327.65, and GBP 1,106.74 per ounce.

Gold has seen quite volatile up and down trading in Asia and Europe but within a narrow $10 band.

It saw gains initially in Asia to $1,752/oz before a retracement to $1,744/oz. It then rose to $1,750/oz again as Asian trading closed.

Early European trading saw gold quickly fall from over $1,750/oz to below $1,746/oz prior to a quick reversal and gold reaching an eight week high at $1,753.45/oz.

Resistance is at $1,750/oz and there appears to be a determined seller at these levels.

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