Gold is Ready to Regain its Shine

I’m back in the gold camp and been digging for some solid gold stock picks and the best etfs for trading this sector. Here’s why:

For weeks I’ve been looking at why commodities and other risky assets were due for a pullback as the U.S. dollar strengthened against the euro. That’s because the dollar has been the currency of choice for hedge funds deploying anti-dollar “carry trades” that would see borrowings invested in dollar-sensitive assets like copper, silver, emerging market stocks, and crude oil.

Through May that’s exactly what has happened. The catalyst for the dollar rally/commodities sell off started back on May 1 when Osama Bin Laden was killed. The dollar rallied, forcing institutional traders to scramble to close their dollar carry trades. What followed were mini-crashes in silver and crude oil and a downdraft for stocks.

Since then, the dollar has gained more than 7% against the euro while commodities have been under steady pressure. But the pendulum is swinging back the other way as the dollar hits overhead resistance from its mid-April bounce. That should benefit gold. Here’s how you can take advantage.

First, recall that long-term fundamentals for precious metals remain positive. Volatility in gold could be with us but supply and demand is supportive of higher prices down the road. The potential for monetary policy errors by the Federal Reserve and the European Central Bank also increase the risks of runaway inflation — a situation that supports gold prices.

Last Friday, gold and gold stocks broke out of their multi-week funk and surged to the upside. For those looking for exposure to the physical metal, I recommend the leveraged ProShares Ultra Gold ETF (NYSE: UGL). The fund returns twice the daily return of gold futures.

As for individual stock picks in the industry, here are two attractive names:

Gammon Gold (NYSE: GRS) is a smallish producer of precious metals that started active exploration in Mexico in 1999. The company’s two mines are relatively low grade, which means GRS is very sensitive to prices staying high as that ensures it can profitably mine its reserves. Shares are moving off of trend line support on a surge of positive volume.

Tanzanian Royalty Exploration (AMEX: TRE) is a mining acquisition and exploration company that operates throughout East Africa. It concentrates on Ethiopia, Tanzania, and Zambia as well as South Africa. Its properties contain a range of metals and minerals including gold, diamonds, copper, nickel, and zinc. Shares are moving up and out of a nine-month trading range.

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The author can be contacted at anthony@edgeletter.com. Feel free to comment below.