Gold, much like other commodities such as oil, has the potential to turn volatile very quickly. Even though gold has risen in an unprecedented pace over the past few years, it has seen quite a bit of volatility lately. In addition, opinions on gold vary widely, with some believing it will go significantly higher and others thinking the past few years were a heyday for gold. Not surprisingly, both of these beliefs are too extreme. Expect gold to bring solid returns, but if you are expecting it to continue its high pace of growth, you might be disappointed.
In terms of volatility, gold is a roller coaster right now. There is seemingly no direction in the macro economy which is causing gold to fluctuate frequently. First, gold, and for that matter silver, prices dropped with the announcement of a Spanish bailout. In fact, the lead up to this bailout shaved about $4 off of Barrick Gold's (ABX) in roughly one week. That equals about a 10% drop, led mostly by economic uncertainty.
However, it's not just the European mess that is fueling volatility. The anticipation of another round of QE is simultaneously causing gold prices to drop. More importantly, the prices are following the interest rate both in the United States and abroad. With signals of a third round of quantitative easing by the Fed, and an interest rate cut in China, gold has fallen steadily.
Even with this information, gold has many bulls in the market which bodes well for Barrick. There are many reasons to like Barrick, notably its higher than average dividend yield. Add this to a significant average price target of over $58 and there is a strong possibly for a very favorable return. A little predictability in the macro economy would certainly help, but gold appears to be doing fine.
On a company level, Barrick made some strategic purchases and acquisitions recently. First it acquired a gold mine in Nevada. This acquisition will give Barrick more land around its Cortez mine which is one of its largest and lowest-cost mines. At a cost of $24 million, Barrick will get a lot of value from this purchase. This consolidation will put it in a good place for future production.
Additionally, Barrick has begun construction on a new mine in Pascua Lama in South America. This mine is expected to produce 800,000 ounces of gold per year. Also, it is projected that in 5 years Barrick will be able to get 35 million ounces of silver from the same mining operation. With production expected to start in 2013, the benefits of this mine won't be seen for a while but it will certainly help fuel the gold rush currently underway at Barrick.
Barrick is not the only company in the midst of a gold rush. Competitor Vale (VALE) is looking to expand its mining operations throughout China. Specifically it has entered into a partnership with Cliffs Natural Resources (CLF) to take advantage of the growing steel industry in China. Taking advantage of the booming steel industry in China will give Vale some diversification. However, it has also entered an options contract with Mill Resources involving the mining of gold, silver, and other commodities. Under this agreement, Vale would provide the funding to Mill Resources in exchange for a percentage of the profits.
Competition will also be heating up regarding dividend payments. Both Goldcorp (GG) and New Gold (NGD) have increased or declared dividend payouts. For New Gold, having a dividend payout could make the stock more attractive to investors. Currently, many investors are seeking value through dividend payouts, shunning many stocks that have below average or no dividend payouts. As Barrick has one of the highest dividend payouts, look to it to set the bar on yields.
Goldcorp does have a strong dividend however. It has paid out a consistent dividend since 2003 and I do not expect this to change.
New Gold is also seeking to increase production of gold through the development of new mines. It expects to mine an additional 80,000 ounces of gold annually through its new New Afton mine located in British Columbia. That the mine is in North America helps, as investors can expect stability and consistency of production.
Another competitor NovaGold Resources (NG) is in the process of simplifying and streamlining its assets. Just this week it announced a purchase and sale agreement to transfer its Rock Creek property to Bering Straits Native Company. This agreement allows NovaGold to focus on advancing its Donlin Gold project, a project in partnership with Barrick. Thus, this purchase and sale agreement should actually benefit Barrick by allowing NovaGold to put more energy into this project.
So, the only thing only thing holding gold mining back is the overall macroeconomic environment. If conditions remain uncertain for some time gold volatility will continue. Until there is some stability in the market it will be hard to tell where gold is going. However, Barrick is in a good position for growth, even in this volatile environment. Watch the economic conditions, if the dollar begins to strengthen gold might not be a great bet but if things go for the worst then gold will increase. Look to Barrick to capitalize on any opportunity.
Now, aside from the outlook of gold stocks at large, Barrick itself has differentiated itself recently in the news. Just last week, Barrick let its CEO Aaron Regent go for failing to bring up the company's stock price. We will have to see how the company does without Regent at the helm, but recent studies have come to doubt Barrick's decision here. As I explained, the inability of Regent to get Barrick's price up was probably due to a larger situation beyond his control. Either way, Barrick was not buying that. Investors should be a bit wary. Gold should be solid and Barrick leads the way, but the question remains about leadership at the front of the ship.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.