Gold Trade: Take Profits & Swap for Mining Stocks Says Purves

Jeff Macke

Michael Purves of BCG Financial is a structural bull on gold and has been for ages. For the long haul he wants to be in the precious metal and in some size. Regardless, the chief market strategist believes it's time for investors to swap out some of their gold in favor of stocks in the miners and some silver. I asked him to make sense of this (mildly) conflicted stance. Purves has a two-point argument for the swap from gold to miners.

First, gold reached his 2011 price target of $1,800 an ounce, but was too fast in doing so. The "slope of the rally from the July breakout was just too steep," Purves says, noting the fact that it's about 20% beyond its upward trendline. He views the risk/reward ratio as dangerous for gold at this point. It could go higher but the price of the ancient currency could drop dramatically and do nothing long technically. "The fundamentals of gold are fine," he says, he just doesn't want to put new money in here.

The second reason to shift from gold to miners is the dramatic underperformance of the miner stocks collectively (GDX), despite gold's run this year. The miners give investors "massive leverage" to the metal which isn't being recognized, in Purves' view. "What drives the (the miners') intrinsic value is the gold price and the assumptions on that," he says. "They're just lagging."

I've owned and traded gold via the periodically for years, yet I've never touched a mining stock and have no real intention to do so. My logic is simple: Mining stocks have people running them while the price of gold just "is". Gold doesn't hedge itself poorly, get sued for poor treatment of its labor force, or screw up investor relations the way mining company managers do. Mining companies basically stand between me and the metal I want to trade; making them a lesser investment, at least in my mind.

Beyond miners' lower valuations relative to gold, Purves counters my negative observations by diversifying his miners call with the (GDX) mining ETF. He says spreading risk among the miners via the highly liquid GDX is a way to capture the mining companies closing the valuation gap without undo risk to specific companies.

Another idea Purves offers is jumping back into silver. He views the gold's semi-precious little brother as a "cheap but noisy gold." Purves has been bullish on silver for over a year, meaning he's both captured a huge move and been whip-sawed mercilessly. He thinks the volatility in silver will begin to settle as investors begin to recognize that silver, like gold, is another form of money. This realization is "taking out volatility," he notes, creating an attractive entry level here in the low $40's.

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