Gold has exploded higher during the past several years. The
bullishness has been ignited by massive global fiscal stimulus
programs, slowing production growth and aggressive purchasing of
the yellow metal by several central banks. It's no wonder gold
prices are up nearly 100% during the past five years.
Take a look at the weekly chart…
Although the yellow metal is off its all-time 2011 highs of more
than $1,900 per ounce, there is solid technical support in the
$1,550 area, as you can see in the chart below. Gold has since
bounced from this support, hitting $1,800 per ounce in October
prior to falling back and finding support at the 50-week
simplemoving average at $1,665.
Despite gold's solid performance over the years, gold-mining
stocks have lagged. This is unusual since gold-mining companies
make theirprofit on the spread between what it costs to extract
gold and the price of thecommodity . Historically, there is a
positive correlation between the price of gold and the performance
of gold-mining stocks.
But starting in 2008, there has been a disconnect. Rising
production costs, political risks in some of the regions miners
operate and simple economic worries have superseded the
common-sense correlation. This has resulted in gold-mining stocks
underperforming the commodity itself, which in turn has resulted in
much of the negative investor sentiment around gold-mining
And it is within this negativity that I see a great profit
opportunity. The key strategy is simple: Buy undervalued
gold-mining stocks poised for a reversal of fortune.
In this case, I think one particular gold miner is a diamond in
Barrick Gold Corp. (
is one of the world's largest gold miners, with 27 operating mines
in North America, South America, Australia and Africa. The stock
has been smacked down from its recent high of $43 a share in
mid-September to $34 in November, which is just above its52-week
low . Barrick Gold boasts the lowest price-to-earnings (P/E ) ratio
of its peers at 10.2 and its 29%earnings growth rate is the highest
among the competition.
The fact thathedge fund wizard David Einhorn doubled his position
in the stock during the third quarter and held it steadily this
quarter, despite the price drop, gives me even more confidence in
Barrick Gold. The gold miner makes up about 1.3% of his U.S.
long portfolio (1.9 millionshares ), indicating a strongbullish
bias for the company.
The company has ambitious plans to reduce costs while ramping up
copper production in the coming years.
NewCEO Jamie Sokalsky is pushing for Barrick's mining costs to
drop from $575 per ounce to between $500 and $525 per ounce during
the next several years. The cost reduction will come from two mines
in the Dominican Republic and the Chile/Argentina border, which
have relatively lower operating costs.
Although Barrick has narrowed its gold production forecast to
between 7.3 and 7.5 million ounces from earlier projections of 7.8
million, the CEO is confident of a production increase during the
next several years. If gold and copper prices stay steady,
then the lower production costs will result in increased
operatingcash flow . Interestingly, despite all these tailwinds,
the stock has dropped nearly 30% this year.
At the end of October, Barrick's price plunged through the 50-
and 200-day simple moving averages, finally finding support at $33
a share. Most recently,shares have bounced above $34. The weekly
chart indicates support at $32.
The company plans to release full-year earnings report on Feb. 15,
2013. Savvy investors will likely be waiting attentively.
Risks to Consider:
Commodity-based stocks are inherently risky. The risk comes
from several sides, namely the volatile nature of commodity prices.
If gold prices unexpectedly plunge, then so will mining stocks. In
addition, political and economic risks also loom largely due to the
fact that many gold mines are located in politically and
economically unstable regions. Always be certain to use stops and
position size properly when investing.
Action to Take -->
Considering the stock's current value and the company's future
plans, Barrick Gold is a great buy now. Any price between $32 and
$35 would make an ideal entry. If gold prices stay relatively
steady and the company meets its cost-reduction goals, then shares
could easily rise to $50 within 24 months. My trading strategy with
this company would be to enter a position within the $32 to $35
channel with stops at $32.
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