Close X Cookies are necessary for the proper functioning of 24hGold.com. By continuing your navigation on our website, you are accepting the use of cookies.
To learn more about cookies ...
EnglishFrench
Gold & Silver Prices in

Gold Stocks Approaching a Crossroads

IMG Auteur
Published : November 29th, 2012
589 words - Reading time : 1 - 2 minutes
( 0 vote, 0/5 )
Print article
  Article Comments Comment this article Rating All Articles  
0
Send
0
comment
Our Newsletter...

 

 

 

 

Recently, the Erste Group published a 120 page report covering precious metals. The report contains an absolute treasure of analysis, figures and charts concerning gold and the gold stocks. I have selected a few of the charts which help us explain the current status of the gold stocks. Essentially, there is a huge divergence between financial performance and valuations. Ultimately, the performance of the shares over the coming months will answer the question as to the resolution of that divergence.



We often hear how difficult of a time some mining companies are having. Although that is true, the reality is present conditions for gold miners have never been better. Rising costs are a problem but margins for the large unhedged producers are at bull market highs (and likely all-time highs).






The rising margins explain the consistent increase in cash flow and net income (with a few bumps) as the chart below depicts. Cash flow and net income for 2012 will also reach a bull market high.






Given the high margins, cash flow growth and record earnings why are the stocks struggling and trading well off their highs? A major and often forgotten explanation is the current low valuations. Several months ago, the price to cash flow valuation of senior producers was equivalent to valuation lows seen in 2000 and 2008. No chart better illustrates valuations then this one from BMO Capital Markets.







Now let’s examine the current technicals and draw a comparison between today’s bull market and the bull market from 1960 to 1980. Below we plot the current bull market in the HUI (red) and the Barron’s Gold Mining Index (BGMI). There are some differences but also some similarities. Note that the level 170 was key support and resistance for the BGMI for nearly five years. Once the Bgmi broke 170, it was headed much higher.






One can better view the current key pivot point from the chart below. The 52-55 range has been key support and resistance for GDX since late 2007. If and when GDX makes a weekly close above 55, you can bet that the prognosis will look quite bullish.






The market is at an interesting crossroads. Financial results have been strong but valuations are weak. The market believes earnings and cash flow will decline and has priced in that outcome to some degree. Ultimately, this will resolve itself in one of two ways. Producer margins can decline which would impact cash flows and profitability. That would eventually lead to lower share prices and GDX could threaten a break below 40. On the other hand, should margins increase then share prices will explode higher from a compounding effect. Rising margins will generate stronger cash flow and higher profits and the low valuations will rebound as sentiment would normalize. This is the fundamental case for the next major breakout in the gold shares.


Given the technical damage from the recent selloff (which went a bit further than expected) one should not anticipate this crossroads to be resolved anytime soon. Think months rather than days or weeks. Ultimately, the shares will break 55 to the upside in 2013 thanks to the combination of a breakout in Gold combined with stable costs in 2013. In the meantime the shares will consolidate providing you time to do your research and find the companies that will lead the next leg higher and outperform. If you’d be interested in professional guidance in uncovering the producers and explorers poised for big gains then we invite you to learn more about our service.


 

 

<< Previous article
Rate : Average note :0 (0 vote)
>> Next article
"Trendsman" is the proprietor of Trendsman Research, which provides financial and investment related research to private and public entities. Trendsman Research provides: a subscription based newsletter to individuals, personalized research to individuals and institutions and occasional reports available to the public. Trendsman is an affiliate member of the Market Technicians Association (MTA) and has successfully completed the CMT Program (awaiting certification) which certifies professionals in the field of technical analysis.
WebsiteSubscribe to his services
Comments closed
Latest comment posted for this article
Be the first to comment
Add your comment
Top articles
Latest Comments
The Libertarian Paradox
24 Sepsam_site
As your article suggests, the state claims to insure an orderly environment so liberty can flourish. The reality is that the state promotes f...
The Truth About War and the State
24 Sepsam_site
Waugh Despite rigging as you say, Ron Paul couldn't even get eight states in 2012. He was too honest - with his "we can't afford the welfare a...
John Maynard Keynes, Immoralist
23 Sepsam_site
Intense Article. Behind the scenes, a Globalist cabal requires a champion like Keynes to legitimize the creation of fake money so the central...
What Gold and Silver Analysts Ov...
19 SepS W.
Well here it is 12 years on and never a truer article has been written. Gold is money and every thing else is "toilet paper" .. to paraphr...
Allegations of Fraud Surface Ove...
18 Sepkevthorne
Excellent article, Mish - it's about time this was highlighted - it is happening all the time here in the UK, with insurance companies, 'phone comp...
Ken Rogoff’s Government Debt Def...
18 SepDRGEORGE1
I thought James Grant's dismissal of this dangerous piece of propaganda was good but yours, Peter, was even better. Please, everyone, who reads and...
Allegations of Fraud Surface Ove...
17 SepGoldGrl0
Mish, you should stick to finance. Publishing unsupported attack rumors won't hurt H, but will hurt your reputation.
The Truth About War and the State
17 Sepkev43211
We will never get anywhere with this characterization of the state. The state is not some malevolent monster always seeking war. However, the sta...
Most commented articlesFavoritesMore...
World PM Newsflow
ALL
GOLD
SILVER
PGM & DIAMONDS
OIL & GAS
OTHER METALS