July 6, 2022

An Undervalued Gold Stock That Could Double In Price

Leveraged earnings gains from rising gold prices have historically resulted in gold stocks outperforming gold bullion.   From 2000 to the highs of 2008, the PHLX Gold/Silver Index (XAU) rose by 345% compared to a 252% increase in the price of gold.

Over the past two years, the out performance of gold stocks has come to a dead halt despite the surge in gold prices.  From $1,121.50 in January of 2010, gold has advanced to the current price of $1,781.10 for a gain of $659.60 per ounce or 58.8% while gold stocks have basically flat lined as represented by the Market Vectors Gold Miners ETF (GDX).

The divergence between gold bullion and gold stocks has resulted in a markdown of world class gold producers, resulting in the best buying opportunity since the 2008 sell off.  John Hathaway, who runs the Tocqueville Gold Fund and has the best track record in the industry recently said this in his Investment Update.

Gold and gold stocks appear to be bottoming in the wake of a four month correction which began in mid -August when the metal peaked at $1900/oz. Bearish sentiment is at extremes not seen in many years. This and a number of other indicators, such as stocks that have been hit by negative sentiment, the downtrend in gold prices since August, and tax loss selling, support our view that a rally lies ahead. This very bullish market set-up, in our opinion, mirrors the extraordinary investment opportunity of the despondent year end in 2007. Even though gold prices have been declining for several months, they finished the year with substantial gains. This suggests that the value represented by gold mining equities held in our portfolio could be extraordinary.

GDX - couresy yahoo.com

Gold price - courtesy kitco.com

Will the glaring price disparity between gold and gold stocks continue?  I have argued in a previous post (see Gold Stocks are Positioned For An Explosive Move Up) that major gold producers with large proven gold reserves are on the bargain table.  The steeply discounted value of gold stocks will ultimately result in gold stock prices surging as the fundamentals of gold stocks are recognized by investors.

The gold stocks most likely to outperform are the ones with the strongest current relative price strength.  One gold stock that fits this criteria and has outperformed the gold stock indexes is Yamana Gold (AUY), a Canadian gold producer.

AUY OUTPERFORMS - courtesy yahoo.com

Yamana has producing, development stage and exploration properties in Chile, Mexico, Colombia and Brazil.  The Company recently announced record fourth and year end results for 2011.  Highlights of Yamana’s performance for 2011 are shown below.

  • Gold production increased by 5% to 916,284 ounces
  • Silver production reached 9.3 million ounces
  • Revenues increased by 29% to $2.2 billion
  • Cash margin increased by 28% to $1,517 per ounce
  • Earning increased by 59% to $713 million equivalent to $0.96 per share
  • Cash flow increased by 48% to $1.3 billion
  • The annual dividend was increased to $0.20 per share
  • The Company’s net earnings were equivalent to $497 per ounce with an average realized gold price per ounce of $1,670.
  • Yamana has industry low cash costs and operates in stable areas
  • Yamana management forecasts that annual sustainable gold production will increase by over 60% to 1.75 million ounces by 2014

Gold prices have surged thus far in 2012 and there is every reason to believe that gold will end the year far higher than its current price (see Fed Lays Groundwork For Price Explosion in Gold and also Why There Is No Upside Limit for Gold and Silver Prices).

The stage is set for an explosive move upwards in Yamana’s stock price based on the confluence of higher gold prices, soaring profits and increased gold production.   Based on the fundamentals, Yamana’s stock is dirt cheap.  The stock is on the verge of breaking out to a new all time high and could easily double in price during 2012.

AUY - COURTESY YAHOO.COM

Smart Money Investors Assess Gold Market

Given the recent extreme volatility in worldwide financial markets, Barron’s interviewed their Roundtable Panelists for an assessment on where we are headed next.   Three of the smart money investment pros interviewed gave their insights on where they think gold is headed next.

Here’s what they had to say:

1.  Investor Felix Zulauf thinks that the stock market will see new lows in the fall and that eventually both the Fed and the European Central Bank will step in to support the financial system.  Although Felix feels that providing additional liquidity is not a solution, “if we don’t do it the system will break down.”  According to Felix, at some point, as the problems get bigger, central banks may hit the panic button and wind up “like Zimbabwe”.  The increasing price of gold reflects the loss of confidence in policy makers, central banks and the currency.  Felix’s recommendation for a bleak future – “own a lot of gold, and don’t have debt.”

2.  Fred Hickey, who is editor of The High-Tech Strategist, also sees the Fed being forced to initiate more quantitative easing as economic conditions deteriorate.  The drawback of more money printing, however, is that “the Fed…can raise the nominal prices of assets – but not the real prices, because inflation will rise.”   Hickey, who owns both bullion and gold ETFs think the better play right now is in gold mining stocks since they have lagged the price increase in gold bullion.  Hickey is recommending Agnico-Eagle Mines (AEM), Newmont Mining (NEM) and Yamana Gold (AUY).

3.  Marc Faber, Editor of The Gloom, Boom & Doom Report, sees a short term bounce in stock prices and a possible correction in gold of $100 to $150.  After a rally off oversold levels, Marc thinks stocks will drift lower due to concerns over sovereign defaults, a dollar crisis, continued social upheaval in the Middle East and developed countries in the West, recession, lower corporate profits and the possibility of a “bust in China.”   As for the gold market, Faber remains long term bullish saying that “As long as the trio of Obama, Geithner and Bernanke are in power, gold is destined to move higher.  Long term treasuries have no value.  They will default by paying interest in a worthless currency.”

Bill Gross, head of investment firm Pimco, while not specifically addressing the gold market, is also bearish on the economic outlook for the the United States and implied that the more quantitative easing is the only option left.  According to Gross, the recent Fed announcement that it will keep interest rates at zero for another two years “indicates that monetary policy has been exhausted, while fiscal policy is hammerlocked by the results of the debt ceiling debate.”

Gold is beginning to look more and more like the only safe haven in a dangerous world.