Sorry King Midas, but nobody cares about what you touch
anymore. That shimmery stuff you melt down to make rings and
things has lost its luster. Gold was the talk of the town around
$1,900 an ounce but since the collapse in prices now it's an
afterthought. Which to me is baffling. I think that the real
reason gold prices are not that high is the same reason people
think that gold should be high. It's all the "worthless" fiat
currencies of the world. Globally we are printing money and
devaluing currency. So the only thing on Earth that should be
worth any money is a hard asset like gold, right? Sounds good in
theory. But who are the major players in the gold market? Who
buys the most gold? Central banks do. So now if your currency has
depreciated then guess what you can't do? Buy as much gold as you
used to. And the cycle continues...
I am not bold nor crazy enough to come out and say that the
tough times are behind us for the precious metals. I do, however,
offer up a couple of charts that may change a few minds. First
take a look at the gold chart using the exchange traded fund
SPDR Gold Shares
). From the October 2012 relative high near $175 we can draw a
trend line channel across the first few tops. This trend was
broken to the downside in April 2013, rendering these trend lines
obsolete for the time being. Just for giggles though, let's
extend these through today. More on this later.
Now let's fast forward to price action since September
2013. We can draw another channel coming down across the
tops through January 2014 only to be violated at the beginning of
February by continued bullish price action. This technical
picture looks a lot different given this new set of
circumstances. The chart changes from a downward death spiral to
dead cat bounce with a side of optimism. Price sits above the
25x5 SMA and, more importantly, above the most recent downward
price channel. To quote the great Jim Carey, "So you're saying
there's a chance!" The next resistance sits at the extension of
the downward trend line from the October 2012 high.
You can't talk gold without mentioning its hard-working,
industrious, albeit less glamorous and attractive brother silver.
On the charts silver and gold have a very high correlation.
Economically this never really made sense to me as they have to
very different sets of supply and demand determinants. Silver has
industrial uses far above and beyond what gold has. Gold pretty
much gets mined, shined, and showed off or buried. Silver is used
to make all sorts parts from light switches to soldering
applications to water purification. Regardless of what theory
suggests, the chart moves pretty much in step with gold. As such,
the silver chart has nearly the same pattern as gold but has not
had the breakout yet from the major trend line resistance. Here
we use the
iShares Silver Trust
) and can see it trading in the $19 handle down from an October
2012 high in the low $30s and a far cry from the all-time highs
seen in April of 2011 in the $48 range.
Gold has a relatively high correlation with many metals, not
just silver. My thinking is that if we see a recovery in gold
prices it will spill over to silver, platinum, copper, aluminum
and a host of other metals to a certain degree.
Entertain my wild ideas for a minute here. What if the pundits
screaming "Gold is dead" are wrong? What if gold has seen the
worst of its decline? What if the recent price action is the
beginning of a gradual recovery in prices and not a dead cat
bounce? What if there was a way to profit from this crazy notion
other than buying GLD or SLV?
If you have never paid any mind to the miners then you might
like what you're about to hear. By investing in a diversified
mining operation we stand to make profits on a recovery in gold
and silver prices but will still be insulated by exposure to
other metals so it is not a "make or break" proposition. Further,
we can use the Zacks Rank to uncover mining companies that have
had the most positive earnings estimate revisions. Given the fact
that miners have been relatively beat up during last year's
market rally we have the chance to find a few real bargains.
Rio Tinto PLC
) is an international mining company with interests in mining for
gold, silver, copper, coal, iron ore, uranium, zinc and a host of
other metals. Fundamentally it's a Zacks #2 Rank. A quick look at
the price and consensus chart gives me hope for the future. You
can see the price tracked the consensus estimates and revisions
relatively closely for the past four years. Estimates have slid
along with prices for gold and silver since Q2 2011 and the stock
sold off as a result. The recent consensus estimates have seen a
bounce off the bottom as prices appear to be stabilizing. Should
this trend continue it is very bullish for shares of RIO.
The technical chart on RIO reads bullish as well. The recent
range from $51 to $57 looks to me like a consolidation after a
big move from the low $40s. A break above $57 with volume would
be a very bullish breakout. Failure to breakout would not be a
sell signal but rather a chance to get in near the bottom of the
recent consolidation range from $51-$53. A breakdown below $51
means you look for another stock to buy.
There is something about the name of this stock that soothes
Stillwater Mining Co
) is engaged in mining operations in the Stillwater Complex in
southern Montana. The area contains gold, copper, nickel,
chromium, platinum and palladium. SWC is a Zacks #1 Rank and its
last earning surprise was a whopping 425%. I want to show the
price and consensus chart because it shares an important
characteristic with RIO. Recent earnings revisions have seen
upwards momentum for the first time since gold and silver began
their decline. I think that a pattern is beginning to develop
amongst analysts which only further supports the idea that gold
may have already bottomed.
The price chart is temporarily bearish but that could change
in a few days. I like the fact that the stochastics are oversold
and awaiting a buy signal. I like the pull back and support at
$12. What I don't like is the speed of the fall from mid-January
to today and I don't like seeing the stock below the 25x5. This
trade set up could take a couple weeks. I would need to see the
stock get above the 25x5, pull back to it, then see a stochastic
buy before I got on board. This is a perfect case of great
fundamentals but I'll pass on the technicals right now. In
mid-December the stock set up perfectly for a buy around $11
which took the stock near $14. But it is not mid-December, it's
February so I would be patient for better technical timing.
If the first two examples were dipping your toes in the water
on a possible gold rebound then this next stock is a cannonball
from the high board.
Franco Nevada Corp
) is a gold focused royalty and stream company with some
interests in platinum group metals. While this does not make it a
100% pure gold play, it does give it added risk to price
movements in the base metal. The price and consensus chart looks
the way you think it would given the other two examples. However,
FNV has only been around since late 2011 so the chart is not as
impactful. Being a newer operation, the analysts haven't quite
figured things out and the estimates have been all over the place
historically. Recently, upwards revisions of some magnitude have
helped push FNV into a Zacks #2 Rank.
On my chart I like what I see. The stock pushed above
resistance at $48 and had been consolidating. It rested firmly
above the 25x5 while the 25x5 had a very positive slope.
Stochastics were beginning to come down from overbought levels as
the stock consolidated between $48 and $50. I would buy today's
break out above $50. If you missed it, that's alright too, a
better opportunity will come with a pull back to the 25x5 coupled
by confirmation from the stochastics. It is a healthy technical
chart with sound fundamentals behind it.
The bottom line is if you believe in a possible recovery in
gold prices these three stocks are all good ideas. With a little
bit of patience you can find favorable entry points that will
offer up the best risk versus reward scenarios. If gold continues
to unwind, hopefully the diversification in the first two stocks
will cushion any downside and a wisely set stop loss will protect
you on FNV. With the chart set up on gold and the earnings
revisions by analysts I think there is a relatively strong case
for at least a consolidation in gold prices if not a reversal of
the long term down trend.
FRANCO NV CP (FNV): Free Stock Analysis
SPDR-GOLD TRUST (GLD): ETF Research Reports
RIO TINTO-ADR (RIO): Free Stock Analysis
ISHARS-SLVR TR (SLV): ETF Research Reports
STILLWATER MNG (SWC): Free Stock Analysis
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