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As commodities find footing, spread between gold and gold stocks grows

|Includes: Barrick Gold Corporation (ABX)

Tim Biggam, TradingBlock  (October 25, 2011, 4:11pm CDT)

Symbol Analyst Target Price Target Date
ABX 49.00 January 20, 2012

Barrick Gold Corporation (ticker: ABX) is engaged in the production and sale of gold, as well as related activities, such as exploration and mine development. It also produces copper, and holds interests in oil and gas properties located in Canada through its oil and gas subsidiary, Barrick Energy. Its producing mines are concentrated in three regional business units: North America, South America and Australia Pacific.

With rumors of QE3 (or at least QE2.5) swirling, commodities have found some footing lately. Gold has rallied off of strong technical support at the 1600 level and looks poised to make a run at the 50-day moving average around the 1740 level.

While physical gold has shown some life, gold stocks have languished, especially the major names. ABX, which is one of the biggest names, is now trading at nearly the cheapest level compared to physical gold over the past two years. We look for the relative valuation discrepancy to converge, and for ABX to be a relative out-performer to gold over the coming months.

Technically, ABX shows strong support at the 43 level and just generated a MACD buy signal, after bouncing off an over-sold condition. We think ABX should make a push toward the 50- and 200-day moving average area of 49 by next January. 

Play of the Day

Based on the Barrick Gold Corporation's (ticker: ABX) current market price of $47.20 and using a target price of $49.00, a target date of January 20, 2012 and $1,000 of investment capital, below are three options strategies (ranked by potential profit) and a comparative stock trade to consider should the price target be achieved at the target date.

Click on the strategy name below to access trade details using TradeBuilder on Powered by TradingBlock's TradeBuilder.

Strategy (click for details) % Return at Target Probability of breaking
even or better
Buy Jan Call Butterfly +216% 71%
Buy Jan Put Butterfly +174% 71%
Sell Jan Call Condor +94% 83%
Buy Stock +4% 56%

* Click link to access TradeBuilder details on Must have Instant or Actual account. Subject to change due to changing market conditions.

DISCLAIMER: This content is provided for educational and informational purposes only. Evaluate any strategy prior to use to understand risk and suitability. TradingBlock does not endorse or warrant any Market Analyst content, service or product. Use this content at your own risk without guarantee or warranty of any kind from TradingBlock. Tim Biggam is a TradingBlock registered representative. He is not compensated by TradingBlock for any market research or analysis services.