Money Morning Mailbag: Soaring Gold and Silver Prices Point to Profits in Equipment & Drilling Industries

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Gold yesterday (Thursday) continued a four-day rise soaring as high as $1,399.70 an ounce as the dollar fell for a second consecutive day.

"Gold is up primarily on dollar weakness and economic optimism," Adam Klopfenstein, a senior market strategist for Lind-Waldock, told Bloomberg. "This is very positive for gold on the future inflation front."

This week Money Morning Contributing Editor Peter Krauth showed why gold and silver are still headed for gains in the New Year, following a 2010 surge.

money morning mailbag

"Precious metals - and gold in particular - have been the asset class of the decade," wrote Krauth. "But it's not too late to climb aboard - there's still plenty more growth to come. In fact, before 2011 closes out, I predict that each ounce of the prized "yellow metal" will be trading at $1,900 - an increase of about 37% from Wednesday's closing price of about $1,390 an ounce."

Krauth cites four catalysts pushing gold prices higher: economic stimulus measures that ignite inflation, gold production that can't keep up with demand, global gold demand continuing its climb and investors being under-invested in the "yellow metal."

While this run up in prices means gold should make way into every investor's portfolio, it also means related businesses will profit as gold prices continue to head north. That idea prompted the following Money Morning reader question.

What other industries are allied with metals that should do well? I am thinking of purifying, transporting, distributing, etc.

- Terry C.

One industry that has been able to benefit from soaring metals demand is equipment makers, many of which are eager for more work since construction projects have remained shelved since the recession.

"For now, I'm thinking of the mining equipment manufacturers," said Krauth. "Caterpillar Inc. (NYSE: CAT) just bought Bucyrus International Inc. (Nasdaq: BUCY), but I like Joy Global, Inc. (Nasdaq: JOYG), which also makes that same type of equipment."

Analysts think Caterpillar's Bucyrus acquisition could push Joy Global into focusing more on emerging market projects in India and China, where it already has a strong position in the underground mining industry.

"Joy Global will exploit these opportunities, both within emerging markets as well as by selling equipment to mineral producers in Brazil, Australia, Chile, Indonesia, and Africa," Susquehanna Financial Group analyst Ted Grace told Reuters.

Joy Global is up 53% so far this year.

Besides equipment makers, Krauth said investors should consider a "picks and shovels" play.

"The other idea relating to metals is on the drilling side," said Krauth. "Contract drillers are an interesting way to play mining, and are a good leading indicator for activity in the sector."

Krauth said that experts are estimating that junior miners, which usually focus on new discoveries, have increased exploration budgets about 60% from 2009.

"That places specialized contract drillers in a particularly sweet spot," said Krauth. "As demand for their services swell, expanding their profit margins, their stock prices could truly soar over the next few calendar quarters."

Krauth explores mining related stocks in more detail in his Global Resource Alert advisory service, where he has one contract driller that has climbed 80% in just over a year. For more information on the Global Resource Alert, please click here.

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