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Is Gold Making A Comeback In 2014?

Jan. 15, 2014 4:29 PM ETKGJI, GORO
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Long/Short Equity, Portfolio Strategy

Seeking Alpha Analyst Since 2012

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Gold prices sorely disappointed in 2013 with benchmark SPDR Gold Trust ETF (NYSEARCA: GLD) declining 28.5 percent. Market participants are not upbeat about the prospects of the precious metal in 2014, but gold certainly deserves a closer look before being written off. While it is true that the commodity has virtually no advocates left now, it essentially means speculative money is out of gold. The lean phase is exactly when smart money makes its move and given the state of economy in the Eurozone, precious metals cannot be written off. This is not to suggest that gold will surely make a comeback in 2014, but specific stocks in the sector are available at mouthwatering valuations. Gold Resource Corporation (NYSEMKT: GORO) and Kingold Jewelry Inc. (NASDAQ: KGJI) are such beaten down stocks which can surprise on the upside in presence of some tailwinds.

Shares of Colorado based mining firm Gold Resource Corporation have dropped 67 percent this year as revenues and profits declined through the period. In the nine months of 2013, the company's revenues dropped 4.8 percent, but profits declined sharply to $4.2 million from $24.5 million in the same period last year. One aspect worth noticing is that Gold Resource Corporation is considered an exploration stage company and thus, its mine construction expenditure is treated as operating expense which hampers net income, but creates long-term economic benefits. The company has invested heavily on expanding its processing capacity this year and the results amplify the impact of already depressed top line. Given depressed gold and silver prices, the company is expected to partially offset the impact by boosting production. The stock offers a dividend yield of 7 percent and while the same is clearly under threat, a forward price earnings ratio of 8 present a strong case.

Kingold Jewelry Inc. is a retail play on gold, as the company is primarily engaged in the business of designing and selling gold jewelry. The company operates in China, which is the single biggest consumer of the yellow metal and as such, Kingold Jewelry has no dearth of business. In fact, its revenues grew solid 28.5 percent in the quarter ended September 30, 2013, while the growth for the first nine months is 22.1 percent. Accordingly, its third quarter profits zoomed 31.4 percent to $11 million. The stock has seen some selling pressure lately and has corrected 13 percent over the last month, which can be used by investors to make fresh buy. Quite paradoxically, Kingold shares are trading at a price earnings multiples of just 3.5 despite clear and strong forward earnings growth.

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