Gold: A New Trend, Bucking the Downtrend
01/06/2010 12:01 am EST
Put together a volatile asset class, a new all-time high, a sharp correction, and the start of a new year, and what do you get? A very diverse set of expectations.
Many of the longtime gold followers are as bullish as ever. Rob McEwen, one of the world’s most prominent gold bugs, recently stated, “By the end of 2010, I see the gold price at $2000, and before the game’s over at over $5000.”
Since gold has made it into the mainstream last year, the major brokerages are now getting a lot more publicity for their gold forecasts. Goldman Sachs recently upped its 12-month gold target price to $1,350 per ounce. Societe General (SocGen) said gold will hit $1500 an ounce by the middle of the year.
This year we’re looking forward to not relearning the “Don’t make short-term predictions” as everything can and will change.
We do know, however, that negative real interest rates are great for gold. And since interest rates are likely to stay low for the foreseeable future, we expect gold prices to go up.
But while gold’s in a holding pattern and the debate over where gold prices will go continues, there’s something much bigger (and more profitable) going on in the gold sector.
A New Trend, Bucking the Downtrend
Over the past few weeks, while gold prices have corrected, interest in a small group of gold stocks has surged. Gold mining companies with the right combination of sizeable and developed gold resources, big name financial backers, and near-term production stories have been doing exceptionally well. Many of them have soared while gold prices have fallen.
For instance, one of the gold companies we’ve mentioned in the past, Gold Resource Corp (OTC: GORO), was trading for less than $4 per share when the report was first issued last March.
But now, with the new trend in gold stocks emerging, shares are more than $11 and the company now has market cap of more than $500 million. Since the gold correction began, the price of gold has fallen 10% and GORO shares have risen 20%.
What sets GORO apart is that is has everything mentioned above. It has a developed resource. The company’s last resource estimation from over a year ago puts it at 1.6 million ounces of gold equivalent with plenty of expansion potential. It has the financial backing of a big-name mining firm, Hochschild Mining (LSE: HOC), which owns 27% of the company and recently put $16 million more in. And GORO will be in production very soon. Commissioning of its mill is currently underway.
John Paulson’s Top Gold Speculation
It doesn’t stop there. This is a trend, not a one of anomaly. Another gold stock bucking the trend has been Gabriel Resources (TSX: GBU).
As you might expect, Gabriel meets all the criteria for the new trend. It has a massive gold resource in Romania. And it’s developed to the point that once the Romanian government gives the go ahead (certainly not an easy task), its full speed ahead for Gabriel.
Most importantly, it has the right financial backers. The wildly successful and famed Paulson & Co. owns 19.9% of Gabriel. Also, the Benny Steinmetz Group (BSG), which owns and/or operates energy, mining, and power plant projects in areas like Africa, Eastern Europe, and Russia, has cut a $67 million check for a 9.9% stake in Gabriel.
With all it has going for it, Gabriel has been getting a lot of attention lately. Since early November, the price of gold has been flat and Gabriel shares more than doubled (with a lot more to come if the Romanian government approves and the problem of the town that’s in the way of developing the mine is solved).
Of course, these are just a few. There are plenty more just like them. The recent bidding war for Canplats Resources (TSX: CPQ) between Goldcorp (NYSE: GLD) and Minera Penmont (a joint venture between Newmont Mining (NYSE:NEM) and Fresnillo (LSE: FRES)) is another example. Then there’s Timmins Gold (TSX: TMM), which is a near-term gold producer that got a jolt of added credibility. Since Sprott Asset Management extended a gold-backed loan, Timmins shares have nearly doubled.
There are plenty more out there, but you get the point. There’s a new trend in gold stocks, and the recent correction in gold is not holding them back.
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Plenty of Room to Grow
That’s why we continue to look for the high-quality junior gold development firms for maximum near-term profit potential.
As the chart below shows, junior gold stocks (bold gold line) offer the best value in the market:
Since the start of 2007, gold is up 70%. The major gold stocks are up about 30%. Junior gold stocks, however, have seemingly missed out on everything. As a group, they’re down 40%.
As gold marches higher over the long run, this will not last. The juniors are going to catch up in a big way, and as we watch the new trend in gold stocks, a large group of junior gold stocks has already started.
For this gold bull market, as we look for undervalued anomalies within bull markets, we’ll continue to recommend the deeply undervalued juniors because from a valuation and risk/reward perspective, they’re the best.
If this new trend in the juniors is a sign of things to come, it’s going to be a highly profitable ride in the very near term, regardless of which way gold prices go.
By Andrew Mickey, editor of Q1Publishing.com