Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Gold Stocks Approaching a Crossroads

Commodities / Gold & Silver Stocks Nov 29, 2012 - 06:22 AM GMT

By: Jordan_Roy_Byrne

Commodities

Recently, the Erste Group published a 120 page report covering precious metals. The report contains an absolute treasure of analysis, figures and charts concerning gold and the gold stocks. I have selected a few of the charts which help us explain the current status of the gold stocks. Essentially, there is a huge divergence between financial performance and valuations. Ultimately, the performance of the shares over the coming months will answer the question as to the resolution of that divergence.


We often hear how difficult of a time some mining companies are having. Although that is true, the reality is present conditions for gold miners have never been better. Rising costs are a problem but margins for the large unhedged producers are at bull market highs (and likely all-time highs).

The rising margins explain the consistent increase in cash flow and net income (with a few bumps) as the chart below depicts. Cash flow and net income for 2012 will also reach a bull market high.

Given the high margins, cash flow growth and record earnings why are the stocks struggling and trading well off their highs? A major and often forgotten explanation is the current low valuations. Several months ago, the price to cash flow valuation of senior producers was equivalent to valuation lows seen in 2000 and 2008. No chart better illustrates valuations then this one from BMO Capital Markets.

Now let’s examine the current technicals and draw a comparison between today’s bull market and the bull market from 1960 to 1980. Below we plot the current bull market in the HUI (red) and the Barron’s Gold Mining Index (BGMI). There are some differences but also some similarities. Note that the level 170 was key support and resistance for the BGMI for nearly five years. Once the Bgmi broke 170, it was headed much higher.

One can better view the current key pivot point from the chart below. The 52-55 range has been key support and resistance for GDX since late 2007. If and when GDX makes a weekly close above 55, you can bet that the prognosis will look quite bullish.

The market is at an interesting crossroads. Financial results have been strong but valuations are weak. The market believes earnings and cash flow will decline and has priced in that outcome to some degree. Ultimately, this will resolve itself in one of two ways. Producer margins can decline which would impact cash flows and profitability. That would eventually lead to lower share prices and GDX could threaten a break below 40. On the other hand, should margins increase then share prices will explode higher from a compounding effect. Rising margins will generate stronger cash flow and higher profits and the low valuations will rebound as sentiment would normalize. This is the fundamental case for the next major breakout in the gold shares.

Given the technical damage from the recent selloff (which went a bit further than expected) one should not anticipate this crossroads to be resolved anytime soon. Think months rather than days or weeks. Ultimately, the shares will break 55 to the upside in 2013 thanks to the combination of a breakout in Gold combined with stable costs in 2013. In the meantime the shares will consolidate providing you time to do your research and find the companies that will lead the next leg higher and outperform.

If you'd be interested in professional guidance in this endeavor, then we invite you to learn more about our service.

Good Luck!

Email: Jordan@TheDailyGold.com
Service Link: http://thedailygold.com/premium

Bio: Jordan Roy-Byrne, CMT  is a Chartered Market Technician, a member of the Market Technicians Association and from 2010-2011 an official contributor to the CME Group, the largest futures exchange in the world. He is the publisher and editor of TheDailyGold Premium, a publication which emphaszies market timing and stock selection for the sophisticated investor.  Jordan's work has been featured in CNBC, Barrons, Financial Times Alphaville, and his editorials are regularly published in 321gold, Gold-Eagle, FinancialSense, GoldSeek, Kitco and Yahoo Finance. He is quoted regularly in Barrons. Jordan was a speaker at PDAC 2012, the largest mining conference in the world.

Jordan Roy-Byrne Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in