Gold Due to Correct: Sell Randgold Resources to $29?

Randgold’s (GOLD) profit fell almost 7% in the third quarter due to higher costs, and its net income and earnings per share slipped.

With rising gold prices during this year, one must be very cautious when the company cannot use such a higher price to its benefit. Now, one must be fair: increased gold prices are offset by increased mining operational costs. Miners, such as Randgold, struggle to find safe locations to deplete their shrinking reserves, and are forced to drill in very risky countries. These risky operations require higher salaries for its employees, and other needed safety and mining equipment.

So, its not really the company’s fault, and to be fair, the company has already issued a guidance that incorporated this cost increase. So, great. But does that mean that one should be long this stock at this price, $37, right now? My answer is no.

Yes, Randgold’s CEO is bullish on gold (hey, that’s his job!), and predicts gold to hit $1,000 this year. Not sure about that. It certainly might hit $1,000, but not right now. Yes, there is a shortage of gold, but market first has to find its equilibrium again. Right now, the price needs to stabilize first before it continues higher. With the monstrous run that gold commodity already had, I can’t foresee another 25% by the end of year.

Add to that the perfect setup outlined here and you can say that gold is due to correct. At least in my world it is. I have been bullish on gold since last year (was not bearish even for a day). But now, it appears, the stars have lined up.

Now, just in time, Randgold came out with its earnings, and although falling short on earnings by 3 cents! (16 cents versus estimated 19), the stock was up yesterday. Perfect! Right in time to hit its major resistance above (see the chart and description below).

Now, don’t get me wrong. This company has a great potential, and is going to find more resources in undeveloped world, that’s for sure. They could soon be stronger than Newmont (NEM) in my opinion, as they forecast further gold production growth. But not right now, not at exact this moment. It needs to accurately reflect what happened during the last quarter first. Therefore, I recommend selling GOLD here.

As we can see from the chart below, Randgold is approaching a major overhead resistance at $37.50-$38.20 area (circled in yellow). Its first major support is at $28.50-$29 area. There is a minor support right below at $35, so that could be your trigger point for either bullish or bearish action. I’d say: Sell GOLD between $37.50-38.00, Short GOLD below $35, and let it drop to $29 (first target). Then we will re-evaluate if it has a potential to go to the second target at $26 (unlikely, but never say never).

Just for your reference, here is the chart of "the perfect setup". In a nutshell, a very long commodity bull market might soon be ending! We may be approaching a screeching halt in gold, materials and oil. It appears to be a perfect setup, at least temporary, for a major decline in commodities. Commodities have already fully priced in the Fed's cut, so it's time to take some profits off the table after this massive rally we just had. And you can see that on the Street Tracks Gold (GLD) chart below. It's hitting a major double long-term resistance at $78-78.50 area. A perfect setup. Do you know that there is no real long-term support line until GLD reaches about $70 level (more than 10% down)- see below? In anyway, it doesn't look good from here, in my opinion. And GLD technical outlook right now fully coincides with Randgold (GOLD) technical outlook (compare the two charts here- almost identical). Therefore, sell, don't buy.

Disclosure: Author has a short position in GOLD

Comments

[pixelm:]

so . . . one reason why costs rise when the price of gold rises is that the price turns waste into gold. When you engineer a mine, you take blocks that cost more to process than the anticipated revenue and call them waste and either don't mine them, or if the mine design requires it for other reasons, you haul it to the waste pile. for example, suppose a particular block costs $50 a ton to process and has $35 per ton of gold in it. It's waste. If gold doubles, it's ore. of course, the average cost goes up, but so does profit.

2007 Nov 02 11:53 AM

[Beris:]

Yes, yes, yes and yes. You are right, Pixelm. It's just that the time has come for this stock, and commodity/mining sector in general to take a breather. I am with you that down the road the gold is to continue rising, and Randgold's profits will rise accordingly. But not now, and not at this valuation/timing ratio. Just my 2 cents. Thank you for reading.

2007 Nov 02 02:31 PM

[Airicon:]

Yeah I agree this was not a great article. HMY, XRA, EXK are all in bullish patterns, so I'm not sure why he thinks that gold stocks are on there way down.

2007 Nov 02 04:51 PM

[vinod:]

gold news

2007 Nov 03 02:03 AM

[TexasRadio:]

The so-called "smart money" (i.e. commercial traders) are supposed to be short gold at epic levels. Despite this, the spot price continues to climb. Why? Because the variables of the short equation did not account for the continued banking crisis, dollar deterioration, and South African mining shutdowns. It is likely that the recent spike in the spot price is due not only to the aforementioned issues but short covering as well. None of these issues will be solved before the end of the year. Thousand dollar gold is looking more credible with each passing day.

2007 Nov 03 04:34 PM

[NutritionFacts:]

IIRC commercials are habitually short in a rising market not because they expect prices to fall but because they wish to hedge against any possible fall in those higher prices.

2007 Nov 03 06:33 PM

[Beris:]

Tex,

I could agree except that there is one variable to consider: nothing goes up in a straight line... nothing, and it never did. So, $1,000 gold? Yes, sure, but not without some sort of pullback, don't you think?

2007 Nov 05 10:46 AM

[TexasRadio:]

John Hathaway has suggested that gold is non-correlated. In a sense, he is right. The correlation of the moment is only verifiable in hindsight, and by that time it is irrelevant. Currently, gold would appear to be benefiting from a deflation of mixed financial assets, to include both residential and commercial real estate, debt, and equity. Throw in a protracted war, energy price instability, an unfolding credit crisis, and it is difficult to see the catalyst for a gold price correction at this time. Sure, it is possible...but unlikely. The risk/reward ratio of such a speculative bet is insufficient as a result. What if a gold buying mania develops? The average Chang has not bought so much as a 1/10 oz. gold panda...yet.

2007 Nov 05 08:06 PM

[Hugh:]

I sold my Barrick gold shares (ABX) at $43 on the news that they were short on earnings, strikes at two mines, protests by hundreds of enviornmentalists in Chile claiming Barrick's operations are melting Glaciers, and Dennis Gartman's view that gold is overbought and too high at the moment. What happens? Barrick goes to $44.50 the next day. Figure this out for me will you?

2007 Nov 03 07:28 PM

[TexasRadio:]

Barrick reportedly has one of the best reserve profiles of any comparable miner. In addition, they have been improving their operations for years. While I don't know anything about Dennis Gartman, I do know that no one can predict the future. That doesn't stop them from trying and the tool most employed is past chart action. Forget the charts and stick to the macro-economic picture. Gold is going up in a recessionary/deflation... environment that is not going to disappear next month. That's why the chartists are scared. Read closely, and you'll see the fear. I have call options on Barrick and I see no reason whatsoever to close the position.

2007 Nov 04 02:12 PM

[Beris:]

Thank you for reading. I enjoyed reading your comments and insights. Market needs two sides of any trade, and I am glad that we are finding that even here. Thanks again to all

2007 Nov 05 11:26 PM

[Beris:]

So far, so good. Both oil and gold have been steadily sliding since pointed out that the mini bubble might soon be bursting (gold at that time was $840, and oil $98). I agree with you that gold will continue higher, but as I pointed out, correction was needed first to cool down the heat. At this time, trend is still down, and I don't expect them (oil and gold) to bounce for another longer-term rally until they reach key support elements. Just an opinion.

2007 Nov 19 01:05 PM

[Warchild NYC:]

I find it interesting that there is almost nobody out there willing to be quoted with a bearish view on gold. That to me in itself is bearish, but when combined with the overwhelming evidence that gold is technically overbought, and with the recent debacle in 2006
when gold dropped dramatically from $730 to $550 in May-June following another mindless (in my opinion) run-up serving as an example of what can happen, it seems like a no-brainer 3-month short here at $824. Will gold continue to run up in the short term? Perhaps, but this panic related to the subprime and SIV crises will recede sooner rather than later, and then the incremental "safe haven" buyers will scratch their heads and wonder why they overpaid for a an instrument with a horrendous negative roll yield. Add in an inevitable bounce in the USD,, and the rush for the exits will be breathtaking. There will always be gold bugs out there, but the odds are heavily stacked in favor of a big correction, in my opinion. I am short 1 contract of December gold and plan to roll repeatedly as necessary (and I get paid $5-7 every month to do so).

2007 Nov 25 10:23 AM