Is Gold Breaking Out? Will That Bring Wedding Bells to Junior Miners?

Gold is a strange commodity. Everybody seems to have a very strong opinion on the metal. Half are absolutely assured that it will drop to $700 in the next few months, and the other half are just as convinced that $1500+ prices are around the corner. And the debate focuses on supposed conspiracies and central bank buying and selling, when in reality the largest factors driving the margins are ETF investment demand, jewelry demand, and scrap supply.

I’m not a gold bull or a gold bear. I don’t care which way the metal moves as long as I’m positioned correctly. But objectively, looking at the charts and fundamentals, it looks like the next several-hundred dollar move is going to be up, not down.

First of all, the gold chart looks like the gold chart is beginning to break out of a classic wedge pullback:

The volume isn’t there yet, but if it comes the next leg up should challenge February highs.

Second, gold has made this move despite a huge increase in scrap supply and evidence of waning jewelry demand. Usually when prices hover near highs despite news that appears negative, even higher prices are around the corner. In other words, the reaction to news is generally a better tell than the news itself.

I’m playing the move, as usual, with a field bet among junior mining companies. About half of that is in four junior miners that could quickly become two: New Gold (NGD), Western Goldfields (WGW), U.S. Gold (UXG), and Rubicon Minerals (RBY).

New Gold (Amex:NGD) - Western Goldfields (Amex:WGW)

This deal is going to happen. It has been publicly announced, recommended by institutional proxy advisors, and in my opinion will be approved by New Gold and Western Goldfields shareholders next week. The deal is basically a 1:1 stock swap. Upon completion, existing New Gold and Western shareholders will own approximately 58% and 42% of the combined company, respectively.

The merger will create an exciting new intermediate gold miner with projected 2009 production of 335,000 ounces, strong cash flow, and good development prospects.

New Gold (NGD)

Western Goldfields

If gold stays flat, I could see the combined company trading at over $2.50 this summer, and significantly higher if gold trades above 1000.

Rubicon Minerals (Amex:RBY) - U.S. Gold (Amex:UXG)

This is not a deal — yet. It has not been announced, or even rumored in any believable way. But I think it might happen. Rob McEwan has too much history rolling up junior miners, to ignore the possibility of a combination. He did it before with Goldcorp (GG).

We know that McEwan is extremely bullish on gold near-term, believing it hits $2,000 by the end of 2010. I wouldn’t be surprised if he acts on that belief by trying to build his second gold major, and if he does that I’m betting he will use Rubicon and U.S. Gold as building blocks to roll up other firms. Maybe it happens, maybe it doesn’t — but as long as the stock charts look this good I’m willing to let it play out.

Rubicon Minerals (RBY)

U.S. Gold (UXG)

DISCLOSURE: Long NGD, WGW, RBY, UXG.

Comments

[InvestBaboo:]

I published in my Blog the day Gold broke out to the upside. My specific recommendations are EGO, GDX and ABX. NEM looks good and look sready to breakout as well. Almost any Gold miner is a BUY now on the charts so you couldn't really go wrong buying just about any of them. You ask me why Gold is going up - I don't know - when it stops, I don't know, but get on the train and enjoy the ride!

May 08 01:50 AM

[PutneyHillYank:]

I like this idea and am accumulating WGW FWIW

May 08 11:52 AM

[Clint007:]

New Gold with the very best management in the mining business.

Rubicon with wonderful Find.

Do your DD and you will agree.

May 09 11:50 PM

[Market Sniper:]

Like you, I do not care what the "price" of gold is as I just buy it. As for the juniors, super beat-up sector as there is little development money available. ABX likes that a lot as they can pick-up proven reserves on the cheap. I would spread the money around and not concentrate on any specific issue. Just keep to solidly run companies with proven reserves and superior management. The majors will come a courting. Eventually.

May 10 12:07 AM

[Tigeress:]

Hi, I own Rubicon. I have stuck with it for the long run. Their mining ore samples are extremely promising. The locale of the land Rubicon owns is very promising territory. I am betting on Rob McEwan to make this one a financial success. It appears to my uneducated eye that they are using state of the art exploratory technology. Also, there is also the possibility of a further on down the road, beneficial to me, buyout of Rubicon...
Just wanted to express my opinion for those looking,
Thank you

May 11 06:36 PM