Loading ...On October 1, tomorrow, the public most likely learns how the government has temporarily shut down. The Senate refuses to pass a bill that includes Obamacare provisions. The House refuses to pass a bill that does not include Obamacare provisions. The two currently committed forces appear to have dug deep into their posture. But one side will eventually flinch! But in the meantime, time to reposition our investments.
The last time this happened was in August 2011. The debt ceiling impasse caused the market to tumble over 20%. So the next few days could be extremely volatile days for stock prices. Many stocks are overbought and in need of corrections, this could be the catalyst for it. This however does not mean all stocks will drop in value; there is a good chance that gold stocks will outperform during this period of uncertainty. Last time this happened in August 2011, gold prices spiked from $1,600 to $1900 in matter of weeks.
Considering the above facts, we have performed extensive analysis to determine if this is the right time to buy gold stocks. Naturally, gold stocks tend to strongly correlate with gold price. Therefore, sense gold peaked about two years ago, so did gold stocks. Since than, gold stocks have been continuously sold and many are trading near 52 week lows. The volume (pressure) however in the last few weeks is relatively low with no conviction. The only days where volume spiked was when uncertainty was suddenly dropped on the market and the fear trade took place. On those days of volume spike, gold stocks traded higher. Quantifying various gold stocks and ETFs, it is easy to determine that sell pressure is low and pent-up demand is high.
Because of how gold stocks strongly correlate with gold prices, it is also important to determine where gold prices are heading. After analyzing gold future charts, it appears that gold futures have been trading higher lately. Typically, the current price will tend to follow the future price to some extent. We feel that this recent bullishness might have come from the 2013 Denver Gold Forum that took place in Sept 22-25. At the forum, numerous CEO from various gold companies spoke with the same theme. The theme this year appeared to be cost cutting, layoffs, cancelation of new projects, cancelation of expansion projects, and decrease in production. The theme was long term bullish for the industry as gold supply is removed from the market and only profitable operations continue to produce gold.
We at Alphas Edge never just analyze an investment opportunity as a buying opportunity; we also define it as a selling opportunity for confirmation. Analyzing gold stocks as a selling opportunity we find that gold stocks in general are currently horrible shorts (with few exceptions). Many of them have significant potential for huge upside moves which would cause significant investment losses if you are short. As we mentioned above, the gold sector has been sold for nearly two years. Meanwhile, the potential gains are limited by gold prices dropping, and prices have been dropping for nearly two years. We identify realistic gold price for the next one year range from $800 to $2,100. There is twice the upside potential than downside potential.
After deep analysis of various different gold stocks, we found that many are very good buying opportunities, and a few of them bad buying opportunities. The stock with the most opportunity (today) was IAMGOLD Corp (IAG). The stock is currently trading at around $4.80. The upmost downside (gold at 800), would still place the stocks fair value above $5/share considering that the company will still be profitable. The company has two primary operations, the Rosebel Gold Mine and the Essakane Gold Mine. In 2012, Rosebel Gold Mine produced 382,000 ounces of gold at a cost of US $671 per ounce. In the same year, Essakane Gold Mine produced 315,000 ounces of gold at a cost of US $603. Both gold mines have probable gold reserves of over 14 years. Relative to many other gold producers, they have a relative low cost.
Another reason to be bullish on IAG is the executive team. Stephen Letwin, the President and Chief Executive Officer gave an excellent 20 minute review at the recent Denver Gold Forum. Some of the highlights were: IAMGOLD had sold a number of assets in Africa in 2011 and purchased assets in North America to balance risk. Now, the company has 3 relative same size investments in North America, South America and Africa. In addition, IAG started cost reduction earlier when compared to other gold companies and have a very strong cash position today. Essakane expansion is close to being finished. The Westwood mine is now completed, in production, and under good management. This mine is expected to produce an average of 186,000 ounces of gold per year during its first five years of operation at average cash costs of $358 per ounce. The mine has a life of 16 years.
The way we see it, IAG stock has a downside potential at around 50% and an upside potential of around 450%, depending on gold prices. The upside is significantly higher than the downside, which is a very compelling reason to own IAG stock. The fact that it is currently paying a dividend above 5% is a bonus (it also sets a floor considering that IAG is fairly consistent on paying dividends).
Typically, we would like to see more capitulation and consolidation in a sector prior to investing in that sector. There is a real change (sense big players are still bearish on gold) that gold prices continue to go down dragging IAGs price with it. However, with the government shutdown seemingly in the bag, waiting is a luxury which we do not have. Today is probably the best day to buy gold stocks and IAG is the best one to own! When some of the big boys realize that they should be buying gold and gold stocks, the price move upward will be violent. Like always, we recommend you don’t take our word for it and do your own research.
Disclosure, we purchased IAG Today.
Note: Here is a complete list of companies which were analyzed prior to selecting IAG as the stock to own.
Agnico-Eagle Mines Ltd – Alamos Gold Inc – Anatolia Minerals Development Ltd – AngloGold Ashanti Ltd – Argonaut Gold Ltd – Aurico Gold Inc – B2Gold Corp – Barrick Gold Corp – Centamin Egypt Ltd – Cia de Minas Buenaventura SA – Coeur d’Alene Mines Corp – Detour Gold Corp – Dundee Precious Metals Inc – Eldorado Gold Corp – First Majestic Silver Corp – Franco-Nevada Corp – Gold Fields Ltd – Goldcorp Inc – Golden Star Resources Ltd – G-Resources Group Ltd – Harmony Gold Mining Co Ltd – Hecla Mining Co – IAMGOLD Corp – Kinross Gold Corp – McEwen Mining Inc – New Gold Inc – Newcrest Mining Ltd – Newmont Mining Corp – Osisko Mining Corp – Pan American Silver Corp – Randgold Resources Ltd – Royal
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