4 picks from 2 top fund managers

Thomas Winmill of the Midas Fund (MIDSX) and Frank Holmes of the U.S. Global Investors World Precious Minerals Fund (UNWPX). Winmill's fund is the No. 1-ranked fund for total returns this year, and Holmes' fund topped the charts last year.

Winmill suggests sticking with mining companies with assets in countries whose legal systems make it harder to wriggle out of contracts. He puts the U.S., Canada, Mexico, Finland, Sweden and Australia on this list.

Next, you want to go with mining companies that have huge, undeveloped deposits that will rise in value as gold crosses over $1,000. "There is scarcity value. As gold prices go up, the value of these deposits can go up enormously," he says.

Winmill puts NovaGold Resources (NG, news, msgs) at the top of the list for both criteria. It owns the rights to a huge gold deposit in Alaska called Donlin Creek, which could hold as much as 33 million ounces of gold. "That is one of the biggest deposits in the world, and the biggest in all of the politically safe countries in the world," says Winmill.

Donlin Creek also contains big copper deposits. NovaGold Resources has a joint venture agreement with Barrick Gold to develop Donlin Creek, which adds credibility to its story. NovaGold has three or four other significant gold fields in Alaska and British Columbia.

"The company has successfully pursued a strategy of tying up large deposits when commodity prices were low and is now bringing these toward production," says Citigroup's Hill, who has a buy rating on the stock. Even before that happens, NovaGold Resources could get taken over because its holdings are so attractive, says Winmill.

Winmill also likes Northern Dynasty Minerals (NAK, news, msgs), which has a huge gold, copper and molybdenum project in Alaska called Pebble. The chairman of Northern Dynasty is Robert Dickinson of Hunter Dickinson, a private Vancouver, British Columbia, mining company that has a good record for finding developing precious metal assets, says Winmill.

Northern Dynasty has a joint venture with Anglo American (AAUK, news, msgs) to develop Pebble. And the mining company Rio Tinto (RTP, news, msgs) has a 19% stake in Northern Dynasty. Close ties with both of those companies suggest either one could buy out Northern Dynasty to get full control of its assets, believes Winmill. "My instinct is someone is going to acquire the company, and it would be good fit with Anglo American and Rio Tinto," he says.

Raymond James Financial (RJF, news, msgs) analyst Tom Meyer describes Northern Dynasty as an "ideal way" to get exposure to precious metals, in part because its shares look cheap compared with peers.

Two favorite gold mining picks of U.S. Global Investors' Holmes are Yamana Gold (AUY, news, msgs) and Goldcorp (GG, news, msgs). Yamana Gold operates several mines in Brazil. The biggest is a cash cow called Chapada where production is growing so fast that the mine helped gold production at Yamana increase by 48% in the past quarter. The company also has several exploration projects in Brazil, Argentina and Nicaragua which it believes will more than double its gold production to 2.2 million ounces a year in five years. Yamana Gold recently agreed to purchase Meridian Gold (MDG, news, msgs) at a price that was low enough so that the merger will add substantially to earnings over time, says Holmes.

Holmes favors Goldcorp because it has stakes in big gold and copper mining projects in Canada and Argentina whose growth contributed to 28% production growth at the company in the last quarter. Goldcorp also has about the lowest costs among the major gold producers. It recently forecast that it will produce gold at an average cost of $150 per ounce in 2007, once credits for the sale of copper and other mining byproducts are factored in. Holmes also believes Goldcorp has a lot of upside potential because it is developing a large gold, silver and zinc project in Mexico called Peñasquito.