The price of gold recently dropped over $50 per ounce in a single day, and it is now well off the 52-week high. From having followed the gold market and mining stocks for years, I have seen this type of drop many times before. When gold sees a big decline in a single day or two, it is often exacerbated by margin call selling and some panic liquidation, which often results in oversold conditions for the metal and many gold mining stocks. This can provide solid buying and trading opportunities. Gold has been in a bull market for about 10 years, and nothing about the recent drop changes that trend. Every once in a while it's normal for the precious metal to have healthy corrections, before regaining the momentum to push higher. Some investors seem to be feeling less need for precious metals due to encouraging reports on the U.S. economy and there is also less concern about a out-of control Greek default. However, I think it's way too early to be ringing the "all clear signal" and investors who rush to dump gold, could be setting themselves up for disappointment and losses in the months to come. Just around this time last year, the stock market was surging and many analysts were telling investors that the recovery was in full swing. Investors who rushed to buy stocks, sell gold and short bonds, were quickly losing money when the stock market suffered a significant correction fueled by a European debt crisis, and a downgrade of U.S. debt. It's possible that history will repeat in the coming months as a similar set of problems is likely to come to light soon:
- The European economy is in a recession and it could continue to deteriorate. Spain and Portugal have extremely high debt levels, and unemployment rates (over 20%) that are similar to what the U.S. saw in the Great Depression.
- The recent debt-swap in Greece appears to have only bought more time, but it has not resolved the fiscal imbalances that exist in that country or other European countries.
- The U.S. economy is still being supported by government stimulus spending and much of that is poised to end after the elections in November. If the European recession gets worse or if China suffers a hard landing, the U.S. economy could get pulled down. Furthermore, just as stimulus is ending, taxes are expected to rise in 2013 and those two factors combined with a need for austerity could reverse the U.S. recovery.
The main supporting factors for a long-term bull market in gold remain intact:
- Many central banks around the world continue to print money, and employ loose money policies. This is likely to continue as governments attempt to solve excessive debt issues by printing currency. In response, investors are likely to continue buying hard assets like gold and oil, as a hedge against currency devaluation and potential inflation.
- India is one of the largest consumers of gold and gold jewelry. Demand for gold is likely to grow from emerging market economies as disposable incomes rise.
- The U.S. debt continues to increase and if interest rates rise, it could become unsustainable. Another downgrade to the credit rating of U.S. government debt could come later in 2012, and that might provide another major catalyst for gold.
A recent article sums up the oncoming U.S. debt risks and it states:
One has to wonder, how much longer the Obama administration can keep borrowing from the US Federal Reserve and global investors to fund US consumers. Importantly, the Obama administration is likely to reach the US$16.4 trillion US Government debt ceiling in the 2013 financial year, and under the August 2011 agreement between Republicans and Democrats this will trigger austerity cuts. Given the US Government is subsidizing the consumer, this could impact US household income and spending.
With many supporting factors solidly in place for gold, it makes sense to use the recent pullback in the metal and mining stocks, as a buying opportunity. Investors who have employed this strategy over the past few years have been well rewarded. Here are a number of gold stocks that are poised to benefit from the long-term uptrend in gold.
Golden Star Resources, Ltd. (GSS) is high-potential gold mining and exploration company. It operates two gold mines in Ghana and has gold exploration projects in Sierra Leone, Niger, and Brazil. It has a joint-venture with the Bogoso/Prestea mine, which is 90% owned by Golden Star and 10% owned by the Government of Ghana. These shares were recently trading for over $2 per share, but now can be bought for less than book value, which is $1.70 per share. This stock also looks cheap when considering that the price-to-earnings ratio is just around six times earnings. Golden Star has a solid balance sheet, which combined with a currently low stock valuation, could make this company an attractive takeover target. If a buyout occurs, the stock could head back toward the 52-week high, around $3 per share.
Here are some key points for GSS:
Current share price: $1.65
The 52-week range is $1.50 to $3.28
Earnings estimates for 2012: 21 cents per share
Earnings estimates for 2013: 26 cents per share
Annual dividend: none
Iamgold Corporation (IAG) is a leading gold exploration and mining company. It has gold mines in North America, South America and Africa. This company has a fortress-like balance sheet with no long-term debt and just over $1 billion in cash. That type of balance sheet strength makes this a lower-risk stock and it also allows the company to pay a dividend that yields almost 2%. Iamgold recently announced a discovery of rare earth deposits at a project it has in Quebec, Canada. It plans to develop strategic alliances or initiate a joint venture to monetize these rare earth assets. With a combination of major gold reserves, about $1 billion in cash, and potentially significant rare earth deposits, this company could also be a takeover target. After a steep decline, investors can now buy into this solid company for about half of the 52-week high. The stock is clearly oversold and it is likely to rebound sharply soon. When you compare the balance sheet, dividend, and price-to-earnings ratio with other gold stocks, Iamgold could be the best value in gold stocks today.
Here are some key points for IAG:
Current share price: $13.35
The 52-week range is $13.10 to $23.88
Earnings estimates for 2012: $1.35 per share
Earnings estimates for 2013: $1.64 per share
Annual dividend: 25 cents per share, which yields 1.8%
Newmont Mining Corporation (NEM) has gold exploration and mining operations in the United States, Australia, Peru, Canada, New Zealand, and other countries. This company offers investors a relatively safe and stable way of playing the gold sector. It has a rock-solid balance sheet, it pays a healthy dividend, which yields about 2.5%, and it operates in stable countries which minimizes geo-political risks. After a big drop, this stock is trading for just a few dollars above the 52-week high and for about 10 times earnings. Analysts expect earnings to grow about 10% next year, and with an above average dividend, investors are well paid to wait for a higher share price.
Here are some key points for NEM:
Current share price: $54.30
The 52 week range is $50.05 to $72.42
Earnings estimates for 2012: $5.18 per share
Earnings estimates for 2013: $5.70 per share
Annual dividend: $1.40 per share, which yields 2.5%
Yamana Gold, Inc. (AUY) operates gold exploration and mining projects in Brazil, Chile, Argentina, Mexico, and Colombia. Since Yamana operates in South America, it is considered to have less geo-political risk when compared with other companies. Eight mines are currently producing gold and this company has three more mines in development. While Yamana shares have upside potential, I would have to pick Iamgold shares before investing here, because Iamgold stock has dropped more and it offers a higher dividend, a lower stock price and even higher earnings estimates. Iamgold also has a much stronger balance sheet. Yamana has about $550 million in cash, but it also has about $432 million in debt. However, Yamana is worth considering on pullbacks.
Here are some key points for AUY:
Current share price: $15.46
The 52-week range is $11.10 to $18.16
Earnings estimates for 2012: $1.20 per share
Earnings estimates for 2013: $1.58 per share
Annual dividend: 22 cents per share, which yields 1.3%
Goldcorp (GG) has a strong balance sheet and management team. It has gold, silver, copper and other mining operations in Canada, the United States, Mexico, and Central and South America. Since it operates in politically stable countries, this company has relatively lower risks when compared to many other gold stocks. Goldcorp is also a top pick for many gold investors because it has a low cost per ounce averages, and that leads to higher profit margins. The company recently reported profits of 66 cents per share in the fourth quarter of 2011. For the full year, earnings were $2.22 per share, compared with just $1.43 in 2010. The company has set goals to increase gold production by about 70% by 2016. This type of growth is likely to propel the stock higher over time. Currently, the stock looks undervalued and it is trading for just a couple of dollars over the 52-week low.
Here are some key points for GG:
Current share price: $44.51
The 52 week range is $41.91 to $56.31
Earnings estimates for 2012: $2.58 per share
Earnings estimates for 2013: $3.44 per share
Annual dividend: 54 cents per share, which yields 1.2%
Data is sourced from Yahoo Finance. No guarantees or representations are made.
Disclaimer: Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.