The Dow Jones Industrial Average cratered after a horrendous jobs report teamed up with lower manufacturing data from around the globe to produce a 215-point drop, or a decline of 1.7%. Yet some stocks were going even higher Friday, strapping on rocket packs and turning in double-digit increases.
But resist the urge to high-five everyone in the cubicles next to you. Smart investors won't celebrate until they know why their stock surged, because without a fundamental basis for the bounce, these stocks can quickly fall back to Earth.
Going for the gold
The dire economic note that was struck Friday finally woke traders up to the fact that there are likely to be horrific consequences to the looming collapse. Global sovereign debt is at unprecedented and unsustainable levels, and that may well lead to sovereign defaults that will spread like a contagion as the dominoes fall.
Such outlooks quickly spurred a flight to gold -- which jumped $60 an ounce Friday, closing at $1,626 -- and, to a lesser extent to silver, which jumped 3.5% to close over $28 an ounce.
Gold's move higher brought along with it junior miners like Great Basin Gold (NYS: GBG) , which soared 15% to lead most gold issues higher, while silver's surge allowed Alexco Resources (NYS: AXU) to jump more than 11%. Along with these lesser names were larger operators like Yamana Gold and Kinross Gold (NYS: KGC) on the gold coast -- both of which closed 7% higher -- as well as silversmiths like Hecla Mining (NYS: HL) , which moved in tune with the precious metal and Silver Wheaton (NYS: SLW) , up 4.5%.
The turnaround for Great Basin is particularly remarkable because it has been a laggard in the space due to problems developing its mines more fully. In its quarterly report two weeks ago, Great Basin said its Hollister operations in Nevada came in 18% below its forecast production levels because of milling issues and the like, which caused its cash costs to rise to $850 per ounce, compared to $670 per ounce last year. However, it expects the situation to right itself by the end of the second quarter.
Its other mine exceeded forecasts, but Burnstone still lags behind initial production expectations due to the discovery of a geological fault that wasn't picked up during exploratory drilling. Now, with the Hollister issues cleared up and no further disruptions at Burnstone, Great Basin ought to be able to get back on track and live up to the promise it made.
With a lot of gold miners, the investment thesis rests on ever-higher gold prices, which, in this economic milieu, certainly seems possible. Even with its difficulties, the CAPS community of investors agrees Great Basin should go on to greater outperformance, with 95% of the nearly 500 members rating the gold miner betting it will beat the market indexes.
You can add Great Basin to the Fool's free stock tracking service, and then tell me in the comments section below or on the Great Basin Gold CAPS page if you think this junior miner has some major opportunities ahead of it.
The silver lining
The promise of Alexco's Keno Hill district in the Yukon likely contributed to its better-than-average jump. Silver Wheaton forecasts huge potential for the project, and with a 25% stake in the stream, it's looking to capitalize on it as well.
Although Alexco's own quarterly results last month were weighed down by significantly lower silver prices -- around $33 per ounce, compared to nearly $40 an ounce a year ago -- it was still producing higher grades of ore than it was last year, and its cash costs have come down sequentially, even if they're higher than in the first quarter of 2011. Silver production is up 30%, and it's on track to produce as much as 2.5 million ounces this year.
Governments lack the wherewithal to shore up the capital needs of the financial institutions that will need help in the coming wave of failures. That will ultimately precipitate the collapse of some big banks, which will scare the bejesus out of markets and send precious-metals prices higher.
As the Fool's precious-metals guru, Christopher Barker, has pointed out, only a small amount of the smart money has made its way to gold and silver at the moment, but that's starting to change. And when it is seen as the historical safe haven it has always been, the rush will cause a surge, and the movement will represent a sea change: "By the time the 'smart money' does finally come to its senses and get itself into proper position with respect to the miners of gold and silver, the Foolish smart money will have smartly beaten them to it."
That could be why 92% of the CAPS members rating Alexco see it outperforming the broad market indexes over time. Add your opinion to the Alexco Resources CAPS page if you think the moment's right for silver to shine, and then add it to your watchlist to see whether the Keno Hill project pans out as Silver Wheaton expects.
Going into orbit
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At the time thisarticle was published Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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