U.S. Fed Meeting To Serve As Catalyst For Gold Stocks

Includes: AUY, EGO, GOFF, NEM
by: Vineet Dutta

(Editor's Note: This article was originally tagged as a focus article on Goff. That was an editorial error that has been corrected. We apologize for the mistake.)

Today the U.S. Fed is scheduled to have its regular FOMC meeting with a statement that follows that typically generates lots of headlines and market action. The Fed's statement and policy decision will be released at 2pm Eastern time. That is when the bulk of the market action is expected to take place. However, the policy statement will be analyzed over the next couple of days following the release and concurrent investment decisions will be made.

Market participants will be highly focused on the Fed's statement to get an idea of what to expect in the future from the Fed regarding rate decisions and other policies. With interest rates and inflation rates playing key roles in the value of gold because of the metal's pricing in dollars, gold investors will be paying close attention to the results. Further clarity on the Fed's bond buying program, is expected to be the key factor in deciding the direction of gold and other interest rate-sensitive trading instruments. Some are already expecting the Fed to continue its bond-buying program for the "foreseeable" future. The Fed continuing the bond-buying program is seen as bullish for gold as more money is printed and put into circulation without any corresponding increase in economic activity.

The U.S. Fed meeting isn't the only factor in keeping investors with a positive view on gold. Other factors include the worrisome European macroeconomic conditions as well as analysts continuing to be bullish on the yellow metal. On Monday, gold prices hit their highest levels since late February as a radical bailout package for Cyprus shook sentiment in the eurozone. The eurozone agreed on Saturday to hand Cyprus a bailout worth 10 billion euros ($13 billion), but required depositors to forfeit up to 10% of their savings, shaking confidence in banks across the continent. Gold is widely noted as a safe-haven play and the corresponding market reaction followed.

The news from Europe may also have an impact on the Fed's meeting as it may give the central bank's doves more ammunition to continue their quantitative easing program of buying government bonds. In minutes from the last Federal Open Market Committee meeting, the Fed noted that "strains in global financial markets" could be a downside risk to economic growth and possible reason to provide ongoing monetary stimulus.

Analysts have continued to offer their support of gold. HSBC is looking for a recovery in gold, saying that rising global liquidity, "inflation tolerance" by authorities, currency wars and an eventual end to exchange-traded-fund liquidation are likely to support the metal. HSBC's currency research team has suggested countries have entered into a currency war and that the "conflict" could escalate this year. "Historically, periods of competitive currency depreciation as outlined by the forex research team are good for gold," HSBC said.

Another analyst said that gold will finish 2013 up, at around $1,880 due to five reasons: the feverish growth of fiat money, the feverish demand for gold, central banks' buying, supply/demand imbalance, and gold breakeven costs continue to rise. The analyst further said that gold and mining stocks are ready to lead the way to a strong rally, setting the stage for a resumption of the bull market. Their respective securities will follow. Here are four gold securities that will benefit from the resumption of the gold bull market:

Yamana Gold (NYSE:AUY) engages in the exploration, development, and production of mineral properties, primarily gold. It also explores for copper, molybdenum, zinc, and silver metals. The company's property portfolio includes seven operating gold mines, including Chapada mine, Jacobina mining complex, and Fazenda Brasileiro mine in Brazil; El Peñón mine and Minera Florida mine in Chile; Gualcamayo mine in Argentina; and Mercedes mine in Mexico. It also has a 12.5% indirect interest in the Alumbrera copper/gold/molybdenum mine in Argentina, as well as holds interests in various advanced and near development stage projects and exploration properties in Brazil, Chile, and Argentina.

Yamana Gold is one of the most popular gold stocks among analysts with it being called a "must-buy" gold stock last week due to its great production outlook and cheap valuation. Analysts concur on the valuation with their $22 price target on the stock compared to a current stock price of just below $15. AUY was also profiled in Barron's about two weeks ago. It was noted that the company's cost of production is about $500 an ounce, well below South African miners' $800-plus, and it has been cutting its capital expenditures.

Goff Corp (OTCPK:GOFF) is a U.S.-based public company. Its wholly owned subsidiary, Golden Glory Resources S.A. is engaged in gold exploration with a view to developing highly prospective gold projects. The company's primary interest is the LGC15011 or "La Frontera" Gold Project in Aguadas, Dept. Of Caldas, Colombia. The project is being assessed for its potential as a low-grade, large bulk tonnage gold and silver prospect. Management has commented that the property shares a similar profile to many other successful gold projects in the region and has all the earmarks of a small, local operation that could quickly turn into something much, much larger -- such as the multi-million ounce projects emerging in the Marmato.

On Monday, Goff announced that it appointed Manuel Hernando Vasquez Serna as a Director effective March 18, 2013, who should serve as a significant addition to the company's efforts in Colombia.. The company's management said: "Mr. Vasquez Serna is an excellent addition to our Board as we begin our efforts in Colombia. He is knowledgeable about the region, the country and especially the rock and geological structure of the region. He has been a leading educator and published author on the subject and is well respected in Colombia. We believe he will be able to contribute considerably as we move forward on the La Frontera Gold Project -- which is a highly prospective gold and silver target and very well suited to his expertise in development."

Newmont Mining (NYSE:NEM) engages in the acquisition, exploration, and production of gold and copper properties. The company's assets or operations are located in the United States, Australia, Peru, Indonesia, Ghana, Mexico, and New Zealand. As of December 31, 2012, it had proven and probable gold reserves of approximately 99.2 million ounces and an aggregate land position of approximately 29,000 square miles. The company was founded in 1916 and its headquarters is in Greenwood Village, Colorado.

Newmont is one of the largest gold miners in the world with a market cap of close to $20 billion. Stocks of that size are usually well-covered on Wall Street and are typically trading close to their fair value but Newmont is an anomaly with the Street consensus target sitting at $53 a share. That is a ways away from its current stock price of $40 a share, which sets up favorably for buyers of the shares. The company is in the midst of a transition, which may be causing some of the weakness in the shares. March 1, it announced that President and Chief Operating Officer Gary Goldberg has been named President and Chief Executive Officer and joined Newmont's Board of Directors.

Eldorado Gold (NYSE:EGO) is a low-cost gold producer with operations in Asia, Europe and South America. EGO has seven operating mines and a pipeline of projects in different stages of construction and development. EGO also operates an extensive exploration program.

EGO is one of the growthier stocks in the industry. Analysts expect the company to record 23% revenue growth in 2013 followed by a 18% figure in 2014. Newmont by contrast is expected to record revenue growth of just 5% in 2013 and 13% in 2014. Analysts have followed that bullishness up with a price target of $16 on the stock compared to a current stock price of just under $10. The catalyst for the growth is management's plans to continue the investment in the company and by 2016, its aim to produce over 1.5 million ounces of gold compared with a 2012 figure of about 660,000 ounces and have cash operating costs of $300-350 per ounce, net of by-product compared with a 2012 figure of $483 per ounce. Management is expecting to reach those goals, in part, by investing $2 billion in development and expansion projects over the next four years in projects in Greece, Turkey, and Romania.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.