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What To Do About Gold Stocks Right Now

By Dr. Steve Sjuggerud
Thursday, January 12, 2006

Shares of Seabridge Gold (NYSE: SA) have doubled since November...

It’s been crazy. Readers of Sjuggerud Confidential are now sitting on a triple here since I first recommended this stock over the summer.

And it’s not just Seabridge... many tiny gold stocks have doubled since November, including shares of Gold Reserve (NYSE: GRZ), which was recommended by John Doody, in his Gold Stock Analyst newsletter.

Frankly, I’m no expert in gold stocks. But John Doody is.

Gold Reserve is the latest small gold stock addition to his newsletter’s Top Ten list. He recommended it at $2.02 at the beginning of December. As I write, it’s at $4 a share. As I said above... it’s been crazy.

I spoke with John this week. I asked him what he thought about this extraordinary move in small gold stocks like Seabridge and Gold Reserve. And more importantly, I asked him what he thinks is the right way for “non-experts” to play gold.

John surprised me a bit with his answer. Here’s what he told me...


I thought John might rattle off a bunch of gold stock names. But he didn’t...

Instead, John said “everyone’s needs are different,” and described the ways to do it for different risk tolerances. Up first, he said “the gold ETF is the least risky way to buy gold.”

The gold ETF, in case you’re not familiar, is the way to buy gold through the stock market. (ETF stands for “exchange-traded fund”.) The stock symbol is GLD, and it trades roughly at the price of gold, divided by 10.

John’s right with GLD. It’s the easiest and cheapest way for most people to own gold, and it’s the best way to own the equivalent of physical gold in your retirement account. You can buy and sell it just like a stock. I was just surprised to see John –a gold stock guy – recommend physical gold over a gold stock.

John often recommends small and risky gold stocks in his newsletter... but he’s done the homework. When I asked him about which ones to buy now that they’ve run up, he was hesitant...

“I get this at cocktail parties... People want a stock tip. But there are two decisions to make when buying a stock... when to buy, and when to sell. Instead of a stock tip, the only way to go about it is to invest in a basket of these smaller gold stocks – at least five of them – to spread your risk.”

So there’s got to be something in between... The gold ETF doesn’t have any upside potential beyond the price of gold. And the tiny stocks can go up by hundreds of percent, or literally go to zero. What’s the best play in between?

“The safest choice is Newmont (NYSE: NEM),” John says. As the only gold stock in the S&P 500, it’s the first place big investors will go to get exposure to gold. John prefers it over the other big name gold stocks.

John also recommends Goldcorp (NYSE: GG) if you’re looking for a big and safe gold stock that’s not talked about as much as Newmont.

As for whether gold stocks are underpriced or overpriced at current levels, John’s indicator (which has an excellent track record) tells us that gold stocks were FAIRLY VALUED at the beginning of January, based on the price of gold.

Let me show you two great calls made by his indicator...

In his May 2005 issue, John said gold stocks were 19% UNDERVALUED.  Back then, gold was at $434.  Gold stocks in general are up 70% from when he said that. The rise in gold is part of that, of course, but John nailed it.

In June of 2002, John’s indicator suggested that gold stocks were 20% overvalued.  A month later, gold stocks fell by over 20%.  That's good stuff.

For the safest ways to play gold and still have some good upside potential, Goldcorp and Newmont may be the ways to go. If you’re conservative, the gold ETF may be right for you.

And if you’re willing to take a risk, you might want to consider a few of the smaller stocks featured in John’s newsletter. I’m a paid subscriber. It’s the first place I turn to size up the market in gold stocks. If you want to know what’s going on in gold stocks, you should consider it too...

Good investing,


Market Notes


Although crude oil is down approximately 10% from its hurricane-inspired highs of last fall, the ten-year view below shows the latest correction as just blip on the screen:


Below is the ten-year view of gold… which has gone almost vertical since breaking out of a nine-month long base in September.

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