After a solid start to 2010, gold’s rally stalled in recent weeks and the earthquake in Japan provided a catalyst for gold to selloff taking some pressure off the market.
The selloff was more technical in nature as gold bullion was overbought and needed to take a refreshing pause before moving up again.
As tension continues to increase with more possible regime changes in the Middle East and North Africa, continuing problems in the PIIGS countries of Europe, and an inability to make budget cuts or pass a budget in the United States gold is moving back to test all-time highs.
This small and shallow pullback is setting the stage for a right shoulder to complete a rough reverse head and shoulders formation allowing gold to start its next leg higher.
Since recovering from the 2008-09 selloff, most gold stocks have traded sideways. Questions regarding how companies will fund the build out of new mines, the ability to bring new mines into production on time and on budget, and the replacement of reserves needed to be answered.
However, we are beginning to see separation in terms of quality for gold equities.
Goldcorp (GG) is the core equity holding in any gold investor’s portfolio. Their ability to bring Penasquito into production is masterful as is their overall corporate strategy of expanding mining districts by acquiring contiguous deposits. This allows Goldcorp to leverage the infrastructure in-place and extend the life of the mining camp.
Increasing cash flows are being returned to shareholders with the dividend more than doubling in the last year and the stock looks ready for a breakout. Downside risk is limited to the $43-44 area but long-term investors would be well advised to begin moving into positions as Goldcorp has established itself as the leader of the pack.
Barrick Gold (ABX) is the next gold stock behind Goldcorp. Barrick was known as a high cost producer with difficulty in replacing their reserve base but the turnaround over the past couple of years has been nothing short of masterful for a company their size. Proven and Probable Reserves are being replaced and Measured, Indicated, and Inferred Resources are growing. Costs have come down, high risk and high cost deposits spun off, with low cost mines coming online.
At these levels, Barrick is a strong buy running neck and neck with Goldcorp. The recent selloff has pushed Barrick down to oversold territory and a move up from here would complete a rough reverse head and shoulders pattern leading to a potential breakout over the summer/fall timeframe.
Yamana Gold (AUY) is in an interesting technical position. The recent selloff has placed Yamana near its 50 day moving average and in the process of forming a reverse head and shoulders pattern similar to Barrick. If support holds, this would be an excellent area to nibble at a position. On the weekly chart, the 50 week moving average just moved above the 200 week moving average in a golden cross, a bullish technical indicator. If the 50 day support does not hold then we will likely move back to the 50 week moving average. The downside risk is a bit greater than a Goldcorp or Barrick but Yamana is tracing out a technical pattern similar to Barrick.
There are a number of currency risks with Yamana as I mentioned in a recent Instablog comparing two neighboring South American countries, Brazil and Argentina, and how they are dealing with inflation.
The recent offering of an 87.5% stake in the Agua Rica project to Alumbrera partners Goldcorp and Xstrata indicates that the Agua Rica project may be more complex to develop than originally expected. The addition of Alumbrera partners Goldcorp and Xstrata will bring operating efficiencies to the project. This will lower the development costs while providing a royalty stream to Yamana when the project goes into production.
While it is a negative that Yamana sold a large stake in the project; the gold stream will provide a nice addition to cash flow when the mine is up and running with minimal capital expenditures.
Agnico-Eagle (AEM) does not have the size of a Barrick or Goldcorp their mines are centered in safe, friendly jurisdictions limiting political risk, a key asset at the present time. The safety Agnico-Eagle provides is very limited exposure to problem areas although the Finnish government just enacted a new mining law which will raise costs for miners operating in Finland.
Agnico-Eagle has been selling off since the beginning of the year and while it appears as though the stock is about to rally it is making a series of lower highs and lower lows. Investors would be advised to wait for Agnico-Eagle to break above it recent lower high before taking a position.
Kinross (KGC) is on my wait and see list. They have some very attractive projects coming into production in the next few years but the stock price is likely to lag while these projects are built out. At this moment their ability to build mines and operate in risky jurisdictions is not an asset but a liability.
Kinross has broken short-term support but appears to be holding support from last summer and is oversold. There is still a small portion of downside risk to Kinross but the stock is likely to begin putting in a basing pattern shortly. Kinross is attractive at these levels for risky investors only. When we see risk return to the market Kinross is likely to see its stock price recover.
Newmont Mining (NEM) is a stock which I am waiting for execution from management. During the 4th quarter conference call a reference was made to the large amount of capital expenditures to just maintain existing production. Technically, investors looking to move into a position in Newmont would be advised to wait until the stock bottoms out and begins making a technical base.
With the pullback in place, gold stocks appear ready to move higher. Seasonally, there is a selloff in May leading to weakness over the summer. How gold equities handle this forthcoming rally in the next few weeks will say a lot about where prices will go over the May to August timeframe.
In terms of gold bullion, the stars appear aligned for the next move higher and investors would be well advised to look to add to their gold bullion positions and begin moving into gold stocks as prices appear very attractive and the stocks themselves are beginning to differentiate themselves.
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Disclosure: I am long GG, ABX.