How To Trade Gold And Gold Stocks In Light Of The Current Earnings Season, Upcoming Elections

Includes: AUY, GDX, GG, GLD, GOLD
by: Smart Equity

Gold has always attracted potential investors, not just because of its beauty but also due to the fact that the price of the precious metal has risen for 11 consecutive years. There are many different ways of investing in gold other than buying physical bullion - like gold equities, gold ETFs and options. One of the examples of gold ETFs is SPDR Gold Shares (NYSEARCA:GLD), an investment fund which reflects the performance of the price of gold bullion. Market Vectors Gold Miners ETF (NYSEARCA:GDX) is another example.

I believe that the $1,700 level has held well so far. According to a Credit Suisse analyst, the QE3 impact has faded already. This coupled with the fact that the physical demand for gold remains lackluster means that the upward momentum in the gold prices is lacking. Presidential Elections can bring some short-term volatility in the industry dynamics. Romney's win (and majority of seats in Senate going to Republican Party) will serve as a negative for the gold industry, given his plans to implement a tighter fiscal policy. However, the current opinion polls show that such a scenario is unlikely. Therefore, downside to the gold prices will also be limited. With not much upward or downward movement expected in gold bullion, I suggest that a better way to gain exposure in gold is through gold equities which have started to climb off 28-year lows relative to the metal.

Yamana Gold Inc. (NYSE:AUY) and Goldcorp Inc. (NYSE:GG) are my favorite gold equities. Increase in sales volumes, record production levels, strong liquidity, sustainable dividend yield and expected increase in future output are some of the reasons why these two gold miners are my top picks. I also like Barrick Gold Corporation (ABX) over the long-term but its current quarter's operating performance has disappointed me, restraining me from recommending a long position in it in the short-run.

Gold - Industry Dynamics

Last month, gold enjoyed favorable rallies as a result of aggressive stimulus measures announced by European Central Bank and U.S. Federal Reserve, which increased its demand as people consider gold as a safe haven for investment and it also serves the purpose of inflation hedging. However, with upcoming Presidential Elections next week and the recent Chinese PMI data showing that the country's economy has started to regain traction, the metal has been trading in a narrow range lately.

Jeremy Friesen, a commodity strategist at Societe Generale in Hong Kong, was heard saying, "The reason for gold to rise is uncertainty." He said that while increasing PMI adds to confidence and reduces uncertainty (which, as already explained above, serves as a negative for gold), an improving Chinese economy would help increase the demand for the precious metal, which will underpin its price.

In such uncertain circumstances, investors are cautious regarding investing in gold and its equities. As already stated, I believe that gold will continue to trade in the range $1,700-$1,750, with downside to be limited to $1,650.

Now let's analyze some of the gold equities:

Barrick Gold Corporation

Barrick Gold Corporation , the top gold miner in the world in terms of production, reserves and market capitalization, has released its quarterly earnings lately. The miner's results are an exception to other gold producers as its earnings missed analysts' forecast average. The revenue also saw a year-over-year drop of 13.5% as a result of lower gold sales and lower average realized price of the metal.

The company saw a drop in net profit to 62 cents per share from $1.37 per share a year ago as a result of an increase in mining costs and a drop in the production levels. The bottom-line was way short of the analysts' average forecast of 99 cents compiled by Bloomberg. Similarly, revenue dropped to $3.44 billion from $3.97 billion, also missing the expected estimate of $3.65 billion.

The company's operating results have been far from satisfactory this year as it disappointed its investors yet again by missing earnings for the fourth consecutive time. In addition, it raised the cost estimate for its mega-mine, Pascua-Luma on the Chile-Argentina border, from $7.5-8.0 billion to $8.0-8.5 billion. The mine's first output is now expected in 2H2014, from an earlier estimate of mid-2014.

The company's gold production for 3Q2012 was 1.78 million ounces, down from last year's 1.93 million ounces. Its total cash cost to produce an ounce of gold augmented from last year's $453 to $592. The average realized gold price also dropped from $1,743 to $1,655.

Barrick's full-year gold production is expected to remain within the range of 7.3-7.5 million ounces. Copper's outlook has been reduced to 450 million pounds as a result of a production delay in Saudi Arabia. The company also deferred almost $1 billion of planned spending at its mines in 2013.

Yamana Gold Inc.

The Canadian gold miner, Yamana Gold, released its quarterly earnings this Monday, which showed a huge drop of 48% as compared to the last year's earnings. A rise in mining costs and lower metal prices outweighed strong sales volumes of gold. However, Yamana's adjusted earnings topped the Street's estimates. EPS of 24 cents was greater than the consensus estimate of 23 cents. However, the EPS fell by 2 cents on a YoY basis.

The company was able to deliver a record revenue of $611.8 million (a year-over-year jump of 10%) as a result of record production of 310,490 gold equivalent ounces (NYSE:GEO). However, total cash costs augmented from $94 per GEO last year to $201/GEO.

The company's Ernesto/Pau-a-Pique and C1 Santa Cruz mines in Brazil are expected to be complete by the end of this year and commercial production is scheduled to start by mid-2013. Consequently, Yamana's output will increase from 1.2-1.3 million ounces this year to 1.5-1.7 million ounces in 2013.

The company's liquidity position remains strong, with $1.15 billion of available funds which includes $400 million in cash. The gold miner maintained its production outlook for this year and is confident of "delivering growth and sustainability".

Goldcorp Inc.

Goldcorp Inc. also reported better-than-expected quarterly results due to strong gold and silver sales as a result of good performance at its Penasquito and Red lake mines. Its net earnings increased from 42 cents (same period last year) to 61 cents. Adjusting for one-off items, the earnings dropped from 56cents to 54 cents, but were way ahead of the consensus estimate of 46 cents. Its revenue also increased by 18% to a record $1.5 billion, beating estimates of $1.4 billion.

The company's new mine, Pueblo Viejo (a joint venture with Barrick Gold Corp.), is expected to achieve commercial production this year. Two new mines in Canada and one in Argentina are expected to start production by 2014.


The following table is a summary of some important metrics to look at from the viewpoint of valuation:

Source: FINVIZ, Google Finance

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.