When Goldman Sachs rescinded its guidance to short-sell gold, perhaps in the face of massive buying of physical gold and silver from Shanghai to Kansas and nearly all places in between, it probably signaled a new bottom in PM (precious metals) prices as June future contracts for gold are rising strongly. GS shorts made 10.4% but elicited record levels of PM acquisition and awareness. The powerful price surge of the metals this week, especially Thursday in which they gained right up to the close indicates that it is timely to initiate or add to bullion holdings.
Remember, more than other equities, PM miners interface between economies, perception and monetary policies that are in a turbulent restructuring process. Therefore, more than other equities, PM miners are mainly trading vehicles with time frames from 2 to 18 months depending not only on prospects for a given company but on market, fiscal and economic developments many of which are impossible to foresee. What is clear is that the fiat game is ending badly with its last gasps expressed in geopolitics, media narratives and market interventions.
So this is a time to buy bullion and miners and hold for a trade suited to your situation and needs. The Friday April 26 drop in bullion prices and miners with the latter giving back most of Thursday's gains improves the occasion to acquire at discount for profit and trading.
Following the GS call, gold and silver broke often-tested support near $1550 and $26.50/oz, respectively, and dropped to $1321 and $21.72 intraday before beginning the current recovery pushed by heavy and increasing buying as chronicled in my last piece as well as the links above. By early morning April 26, silver had climbed to $24.40/oz, closing very near its daily high, from the April 25 low at $23.56. Gold was at $1472/oz up $35 from its low and also just below Thursday's high at $1474/oz. Mid-day Friday gold was at $1452 and silver at $23.74/oz. The one or three-month charts clearly show the push off the cliff just as the 5 or 10-year charts show that PMs remain in a two-year basing amid a powerful secular bull that reflects devaluation of fiat currencies and global debt crises. Apropos this point, scholars like Dr. Antal E. Feteke of the New Austrian School explain that continuing expansion of fiat liquidity hastens the time when gold will be held and not readily available for exchange. This dynamic is guaranteed by fiat debt creation and will be reinforced by the negative impact that the recent price collapse had on many miners in regard to financing and profitability. Production at first will fall as demand rises further boosting prices. That is the macro-economic fact that will affect markets, economies and the monetary system in due course.
This article notes an aspect of April 25 PM miner trading that often recurs and should help direct your trading choices and holdings. I also will mention the miners that seem to be among those with maximum sustainable upside potential. The resurgence is likely to have staying power due to the forces noted above. Consider: the USD index (DXY) closed April 25 at 82.627, down fractionally but higher than its level in recent weeks and well within its YTD range. Again on Friday DXY fell to 82.439 but PMs also dropped. Thus the recent collapse and recovery of PMs and miners are not mainly driven by USD values which are relative to other fiat currencies. The drivers the past 2 weeks were the GS guidance, institutional sentiment, computer-driven trading and margin calls on the downward side that led to massive and continuing buying that signals positive fundamentals going forward.
First, a key strategy illuminated by Thursday's price action: while PM spot prices surged from the opening, rose steadily and finished strongly the miners who for six months have performed badly charged out of the gate but peaked midday, tailing off significantly toward the close though nearly all of them finished higher. First Majestic Silver (AG) is a good example: Wednesday it recovered 9.3% and Thursday again surged nearly as much finishing at $12.63/share, up 4.73% but nearly that same amount down from its intraday high. From major producer Barrick (ABX) which reported heartening results and strategy to junior streamers like Sandstorm Gold (SAND) the pattern was the same: surge and fade. The takeaway is that in buying miners one should use limit orders to catch them on a dip and take advantage of the often large intra-day swings. Many of you probably have noted that often there is a significant drop at the open or between 9:30 - 10:30. In any case, choose several companies to watch, use limit orders, calls or puts if you can manage them and don't chase. There are many fish in this sea.
My view is that three of the streaming and royalty companies offer the best prospects for gains with little direct exposure to the risks and costs of miners. The streamers and royalty companies like Silver Wheaton (SLW), Franco-Nevada (FNV) and SAND respond most to PM prices which in turn reflect market sentiment, skewed as it may be about PMs as well as retail and CB buying. SLW remains the best choice for its diversity and size of contracts, great income/revenue ratio and minimal overhead. It is recovering strongly from the irrational, guidance-driven lows and ensuing panic that afflicted the entire sector last week when it briefly dipped below $22. To affirm the strategy: Thursday SLW rose $1.04 from Wednesday's close, 4.2% only to subside and finish at $24.40, a bit less than half the intraday high. To best take advantage of the miners and related companies you must familiarize yourself with their chart, target estimates and track the movement of spot bullion prices. SAND has promising contracts and good management. This also is true for FNV, headed by Pierre Lassonde and it has been among the leaders in recovering from new 52-week or secular lows. Having bottomed early last week at $34.53 FNV closed Thursday at $43.37, up 4.43% on the day but down like nearly all PM miners 40% from its intraday high. Again, catch some of these with a limit order chosen by studying their action the past week and month. April 26 is typical of miner volatility and is a chance to acquire or to familiarize yourself further with price action.
The junior gold miners ETF (GDXJ) were strong April 25 rising 1.74% on nearly double volume and closing not far from its intraday high. The matrix of forces pushing bullion prices higher suggests GDXJ may make a strong recovery back toward $20/share. McEwen Mining (MUX), a junior I often have mentioned (President and CEO is Rob McEwen who founded Goldcorp), was up 4.33% to close at $2.17. This is 24% above its recent bottom and indicating positive sentiment it held nearer its Thursday high than most of the sector. On Friday its decline was slight. Mid-tier commodity and geographically diversified Eldorado (EGO) that I have chronicled here for five years has tracked gold bullion quite closely. It pays a twice-annual dividend and its total asset to liability ratio is 12/1. Currently producing about 60% of its gold in Turkey and 40% in China, its development projects by 2016 are expected to balance its profile to 50% in Turkey, 22% in Greece, 10% in Romania and 18% in China. Two other mid-tiers that pay a quarterly dividend and have abundant reserves are Yamana (AUY) and Kinross Gold (KGC). Both have been relatively slow in coming off the recent bottom but mainly are following the sector trend. AUY is among the lowest cost producers and its mines are in Latin America: Mexico, Brazil, Chile, Argentina and Colombia. It is a relatively young company (ten years) with 7 major sites and a 1.04 quick ratio. Yamana has a target estimate price of $18.76 (it closed Thursday at $12.42) and a strong Buy consensus. The Market Watch 2013 target for KGC is $9.98, about 90% above its current price and it is rated overweight. Its slide Friday leaves it 9% above the recent bottom.
Among Silver companies, Silver Standard Resources (SSRI) with major mines in Mexico closed Thursday at $7.31, up 3.61% on double trading volume that did not slide much in the afternoon. Since 4Q 2012 it fell 60% from its 52-week high and its target estimate at $15.58 is 115% above its current price. The guidance to overweight is not as strong as Yamana or Eldorado but it is well-established (1946 founding) and has a quick ratio of 2.29. Its potential is rated as greater than its 2013 expected earnings. It has no long term debt and a low .15 debt/equity ratio. Its income/ revenue ratio is 23% and has substantial upside and good trading value. It gave back 5.53% Friday and traders may get in near the panic bottom.
Given the monetary and economic factors noted above, two major producers offer deep value and excellent trading opportunities. For all its recent troubles that I have reviewed here and here, Barrick Gold which Thursday gave back most of its intraday gains still has enormous reserves and very low cost mines in Nevada, well below the all-in cash costs of the industry. Its Australian and African operations are high cost but they are a small fraction of its output. It is focused on cost-cutting, consolidation and developing the Argentina portion of its major undertaking at Pascua Lama pending resolution of the case about environmental impact on three glaciers on the Chilean side. As I wrote (see previous link), bringing two experienced Chilean mining executives on board to dialog with local communities and the government in Santiago augurs a positive outcome for this project. In the meantime its new but producing Pueblo Viejo project in the Dominican is a plus but not a make or break for the company's value: ABX is working with President Danilo Medina but can walk away if necessary and concentrate further on its American and Argentinean sites. Having under-performed its sector for 16 months and with its drastic fall in market cap, ABX now yields 4.2% and has target estimates ranging from $26 - $34/share. With its price now at $19.06 in my view it represents solid value and an excellent trading vehicle a year or two hence. Given the plans and comprehensive strategy detailed by CEO Jamie Sokalsky at his recent report (linked above) on Q1 I believe there is a good chance Barrick will turn things around in the next 1-3 years and become an intriguing growth story. Even with the last terrible five quarters, it has a low .72 quick ratio and its more than twenty producing mines to sustain its debt ratio.
Lastly, Goldcorp (GG) is good value at current levels ($29.90, up from its recent 46-month low at $27.11), a good trade with significant growth likely. It yield is 2.01% paid monthly. It has manageable long term debt to capital at 3.33 and its income/revenue is 32%, solid for a major miner with ten sites. Its P/E is 15.5 and net margin 32.18. Heavily followed, Market Watch analysts have an $43.49 average target 2013 price, about 48% above its Thursday close at $29.90.
On the hard asset side, Sprott Physical Silver rose 4.82% and like the bullion it tracks it closed near its high for the day. The fundamentals, sentiment and monetary situation for PMs are very strong now and the recent artificial collapse makes nearly all miners excellent buys for trading. One must follow spot bullion prices as well as the buying volume in the companies you wish to acquire. A week ago we entered that point of which Rick Rule spoke when he said that "fortunes will be made" in this sector. Just don't fall in love with the fundamentals or price action of any of these companies, not even the soundest like SLW. Given the macro conditions noted at the outset, the outlook is very good but manipulation of these core valuation assets and silver's engagement in global industry means one must monitor them closely. The same holds true for platinum and palladium metals and miners.
Lastly, minimize trading in taxable accounts. It is good to limit taxable events: don't feed your accountant or the government-sponge more than absolutely necessary. There has been great pain, much of it needless in this sector: this is a time for recovery, growth and life-enhancement.