On Tuesday morning I purchased a medium sized position in US Gold Corp (NYSE:UXG) at $6.16. I’ve been watching U.S. Gold Corporation (UXG) for some time now, as it was founded by the the current management of Gold Resource Corp. (NYSEMKT:GORO) and sold to Rob McEwen (former CEO of Goldcorp). The stock has been pulling back after a surge up to the $7.20 area, and to me, looks to have some support in the $5.80 area. This is a very volatile stock, so any good news could send the stock sharply higher.
At the moment, I will skip on providing a detailed description of the company’s filings, and just go over what I think are the key points here. UXG has a very big cash position and no debt, both of which are important for the sustainability of the exploration operations. More importantly, they have recently acquired three smaller mining companies with properties surrounding UXG’s Nevada holdings, giving them a much bigger opportunity to become a premier mining company. Exploration on UXG’s original properties have been ongoing for quite some time, and drilling results from the exploration should begin to trickle out. Maybe I’m reading into this too far, but from where I sit, Rob McEwen would not go out and acquire the companies with holdings around UXG unless he was seeing some very interesting results on the base properties, so my speculation is that drilling results will impress the market. I can’t predict when they will come out, but I want to be in the stock when they do.
On a broader sense, I have decided to increase my allocation to gold based on several data points. First, the very weak housing number is going to continue to pressure the Fed for a rate cut. Very simply, any rate cut will send the dollar off a cliff. We could see $800 gold on a rate cut.
Second, oil prices have gone back to $66, and I believe have the potential to go back to $70. This has the potential to affect gold in two ways. First, rising oil prices are going to further pinch the consumer, and along with rising food prices, could have a serious impact on consumer spending in the coming months. This holds serious danger of provoking a much steeper than expected slowdown, and could force a rate cut that would propel the dollar downward. On the other side of the coil, with oil prices continuing to rise and inflation yet to come into the Fed’s comfort zone, we have the potential for more inflation mongering. To me, this is less likely to happen, but it nevertheless makes gold an interesting play because it has multiple catalysts. Inflation worries and growth worries at home both have the potential to push gold higher, and UXG’s prospects will be all the better with $700+ gold prices.
UXG 1-yr chart