Seeking Alpha
Long/short equity, value, REITs, macro
Profile| Send Message|
( followers)

Gold and silver futures plummeted last week and early this week. They now give every indication of having put in a “V” bottom (overnight Sunday to Monday Sept. 25-26, 2011). Gold futures peaked recently at $1,923.70, and they bottomed overnight (Sunday to Monday) at $1,535.00. At the time of this writing gold is at $1,625.60. Since the overnight bottom Sunday to Monday of $1,535, it has fluctuated between $1,675 and $1,585. On the bounce from $1,535 it made it back up to $1,640. That’s more than a $100/oz. bounce in a few hours. This reeks of capitulation to me.

Silver futures peaked recently (they were higher earlier in the year) at $43.50/oz., and silver futures bottomed at $26.15 overnight (Sunday to Monday). Later the same day (Monday) the silver futures bounced back up to $30.83. That’s almost an 18% bounce up in a few hours. That seems like a capitulation “V” bottom to me. The silver futures have been consolidating since. The current reading is $31.00. That rapid drop and rebound was scary, but it seems to have been good news.

In the last few days copper has put in a new 2011 low ($3.07) Monday followed by a near low ($3.08) Wednesday Sept. 28, 2011. In each case it has left a long candlestick tail. This is a strong indicator of likely upward movement soon in candlestick charting theory. A double bottom is another strong signal of a likely upward movement, although it is weaker for having occurred within a three-day period. It is at the very least a likely signal for a near-term upward movement in copper. Copper futures hit a high of $3.48 in between bottoms. This looks like capitulation to me.

If you put this in the context of the expansion of the EFSF approval process, it may really indicate a turn upward. The Finnish Parliament, which had been thought to be a major stumbling block to the approval process, approved the expansion of the EFSF facility Wednesday Sept. 28, 2011. The German Parliament approved it early Thursday. There are more countries that have to approve it, but final approval is now expected.

The U.S. Initial claims number was 391,000 on Thursday, which was significantly lower than the expected 419,000. The third estimate of the US Q2 GDP was 1.3%, which was a little better than the expected 1.2%. It was significantly better than the previous estimate of 1.0%. The German Unemployment Rate was a beat at 6.90% versus an expected 7.00%.

These are all signs of improving economies, not of an imminent fall of the U.S. and the EU economies into recession. At the very least they should take the edge off the fear that has been pervading the markets recently. The HSBC China PMI reading of 49.9 for September just came out as I write. It does not instill confidence, but it is significantly better than the HSBC flash PMI of 49.4 earlier in September. Plus, the official PMI has been running higher. The HSBC was 49.9 for August, but the official PMI for August was 50.9 (mild expansion). I would expect something similar for the official September Chinese PMI number.

With the edge off the fear, which made investors sell everything, including gold, one has to look at the rest of the picture. The U.S. is still trying to fight the deflation of the housing market. The Fed is buying longer-term bonds with expiring shorter-term bond proceeds. The ECB, with the Italian Dragi coming in as President Nov. 1, 2011, is expected to be more accommodative. Many expect the ECB to lower rates from 1.5% at least to 1.0% by the end of 2011. The bond buying they apparently will be doing will be tantamount to “printing money.” The RBA (Australia) is expected to lower interest rates by 0.75% by year end. Roubini expects the U.S. Fed to start a new QE program by year end 2011.

If a lot of this happens it should provide inflationary pressure. This seems likely to push gold upward. At the very least it seems likely to keep gold prices from falling further. It also seems likely to buoy the equities markets. No one knows exactly how the European situation will play out. A Greek default is no longer the Black Swan event everyone has been fearing. Italy and Spain are what has everyone worried now. Greece is more of a default waiting to happen.

It seems people are just trying to put it off as long as possible to allow the banks, etc. to prepare themselves for it. This is a reasonable strategy. The decision on the next tranche of the original Greek bailout has been put off until almost mid-October. Is there still fear? Yes, but the markets have to go on. Now that they are far oversold, they can easily rally on “no bad news.” In fact many eminent analysts have called for such a rally. Doug Kass, who called the bottom in March 2009, has called another bottom. Art Cashin of UBS has called for a rally. I could go on.

Gold equities that have been beaten down with the overall market, and the price of gold are one of the likely beneficiaries of this rally. Many of these companies’ estimates are still based on $800/oz. gold. Few if any estimates are based on any value of gold over $1,500/oz. If gold has found a fairly solid bottom at $1,535, it should mean that gold equities can rally. I point out that gold is currently at $1,625.60 -- a long way from $1,500. Some of the gold equities that might benefit are: Barrick Gold Corp. (NYSE:ABX) -- the stalwart of the industry, Allied Nevada Gold Corp. (NYSEMKT:ANV), IAMGOLD Corp. (NYSE:IAG), Great Basin Gold Ltd. (NYSEMKT:GBG), and Rio Tinto Plc (NYSE:RIO). The fundamental financial data for these stocks are in the table below. The data are from TDameritrade and Yahoo Finance.

Stock

ABX

ANV

IAG

GBG

RIO

Price

$46.25

$35.30

$19.89

$1.68

$46.41

1-Yrea Analysts’ Target Price

$67.10

$53.84

$27.03

$4.55

$96.97

Predicted % Gain

45%

53%

36%

171%

109%

Annual Dividend Rate

$0.49 (1.10%)

N/A

$0.20 (1.04%)

N/A

$1.17 (2.52%)

P/E

12.32

230.72

9.02

N/A

5.69

FPE

7.85

18.68

13.53

6.72

4.67

Average Analysts’ Opinion

1.9

1.8

2.0

2.0

1.6

FY2012 EPS Estimate

$5.89

$1.89

$1.47

$0.25

$9.94

FY2012 EPS Estimate 90 Days Ago

$4.64

$1.63

$1.20

$0.23

$9.56

EPS % Growth Estimate for 2011

49.80%

34.10%

72.40%

240.00%

25.80%

EPS % Growth Estimate for 2012

18.70%

243.60%

12.20%

257.00%

11.40%

5-Year EPS Growth Estimate per Annum

21.93%

N/A

29.60%

N/A

9.00%

Market Cap

$46.20B

$3.15B

$7.46B

$798.00M

$89.45B

Enterprise Value

$46.20B

$2.87B

$6.39B

$986.87M

$99.78B

Beta

0.61

1.52

0.58

1.10

1.68

Total Cash per Share (mrq)

N/A

$3.42

$2.87

$0.08

$4.07

Price/Book

2.12

5.95

2.23

1.67

1.44

Price/Cash Flow

8.95

153.13

13.52

--

4.58

Short Interest as a % of Float

0.94%

3.68%

0.77%

2.91%

0.43%

Total Debt/Total Capital (mrq)

36.21%

4.41%

0.12%

30.96%

20.78%

Quick Ratio (mrq)

1.51

11.15

4.28

0.56

1.22

Interest Coverage (mrq)

60.66

184.89

--

0.84

--

Return on Equity (ttm)

20.17%

2.60%

13.36%

-8.45%

29.52%

EPS Growth (mrq)

40.26%

-84.46%

220.79%

84.60%

28.69%

EPS Growth (ttm)

188.95%

-75.90%

352.91%

6.46%

73.55%

Revenue Growth (mrq)

30.71%

-9.52%

74.48%

49.55%

18.38%

Revenue Growth (ttm)

27.50%

40.42%

59.76%

208.35%

25.59%

Gross Profit Margin (ttm)

59.12%

55.48%

48.80%

31.75%

--

Operating Profit Margin (ttm)

47.41%

9.27%

38.34%

-7.94%

37.94%

Net Profit Margin (ttm)

31.90%

9.94%

27.66%

-27.82%

28.36%

ABX is the strongest and safest pure gold play. It also is slated for good growth by analysts. RIO is the best value play, although it is not a pure gold play. It is a big miner that mines a lot of things. ANV is a high growth gold and silver play that is in the beginning stages of becoming a mature company, but it still has high growth. IAG is perhaps a little more mature than ANV with still high growth. ANV recently increased its resources numbers. Its overall, measured and indicated mineral resource, inclusive of mineral reserves, increased to 16.9 million ounces of gold (from 16.1 million ounces) and silver decreased slightly to 593.7 million ounces (from 598.1 million ounces). It has many projects that are in very early stages of development -- a lot of growth potential. GBG is a small, high growth gold company that is about to be recognized. It may be a buyout target.

The charts of these stocks should give a good idea of their strength and potential in this troubled market. The two-year chart of each is below.

The two-year chart of ABX is below:



The two-year chart of ANV is below:



The two-year chart of IAG is below:



The two-year chart of GBG is below:



The two-year chart of RIO is below:



The slow stochastic sub chart of each of the above companies shows that each is oversold. Each is at or near its lower Bollinger band (oversold). Each is far below its 200-day SMA. It seems likely each should move back toward its 200-day SMA in any overall market rally. The ANV chart is the strongest. The company has loads of potential in new mines under development. ABX and IAG also have strong charts given the recent market behavior. RIO is just a good value play, which is slated by analysts for great one-year price growth.

A number of analysts have suggested that this market may continue to sell off through Friday. Mutual funds and hedge funds may sell their losers so as not to be holding them at the end of the quarter. Any they like, they can buy back next quarter. This may be mostly done by now though. Many traders don’t like to be caught in a selling stampede at the end of the quarter. The market could easily choose to rally on Friday. A couple of other good value play, great growth, gold (and other things) miners are FCX and TCK. Both of these are good investments too.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in RIO, ABX, ANV, IAG, GBG, TCK, FCX over the next 72 hours.