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Gold: Poised for a Breakout
Posted by: Jason Burack (IP Logged)
Date: February 19, 2013 11:01PM
Gold continued its historic bull run in 2012, but with one of its worst performances, only gaining 7 percent.
However, this year will likely be considerably better for both gold and silver — and ultimately companies that produce these precious metals.
We expect gold to challenge and surpass the $2,000 per ounce mark sometime in the next 18 to 24 months. We also expect silver to challenge the $50 per ounce barrier in that same time. These scenarios are highly probable and it’s possible we could even see bigger moves in 2013.
Demand from investors trying to protect their purchasing power as central banks rapidly devalue their fiat currencies and from central banks that no longer trust the currencies and sovereign debts of their trading partners will put a strain on gold supply, moving the price higher.
For decades, global central banks had been net sellers of gold and this put a tremendous downward pressure on the price of gold.
The reverse has become true. Gold has a number of powerful tailwinds that will now propel its price higher.
Countries that run U.S. dollar pegs or fixed exchange rates import massive amounts of inflation after each new quantitative easing (QE) program the U.S. Federal Reserve announces.
As these countries attempt to maintain a fixed exchange rate to the dollar, their money supply grows in lockstep with US money supply, therefore inviting inflation into their respective borders through the exchange rate mechanism.
Another positive sign for gold’s rise in 2013 is that both China and Russia are contributing more than 50 percent of their yearly trade surplus into buying physical gold. And these two countries have implemented policies preventing gold from leaving their borders.
Growing demand from investors in developing countries such as China is also increasing rapidly and should help to drive gold higher.
During gold’s last bull market up until 1980, no one in China was allowed to own gold. Now the Chinese are allowed to own the yellow metal. The Chinese, like their Indian neighbors, have a very strong affinity towards gold and we see no signs they will stop accumulating precious metals. Chinese demand should help put a floor under precious metals prices.
With a few exceptions, gold and silver companies have massively underperformed the gains in their underlying commodity and the S&P 500 since April 2011, but this trend should change for the reasons mentioned above.
One of the top stocks to watch is Goldcorp (GG). The stock confers close to a 2 percent dividend yield and the company sports good near-term production growth because of its large Penasquito deposit.
Gold prices have been volatile but they offer opportunities for investors willing to endure the ride. This reality is especially apt for Goldcorp, the shares of which sometimes lag the yellow metal over the short term but ride its ascent to solid gains over the long haul.
Goldcorp enjoys burgeoning production, extremely low costs and expanding reserves, all of which will likely fuel the stock’s performance in 2013. The company’s reserve base is deep and should help the company meet its ambitious production targets. Likewise, the company boasts a pipeline chock full of promising projects, such as its Cerro Negro mine in Argentina, all of which are on track to initiate production over the next few years.
Goldcorp is fortunate enough to operate in countries that are relatively peaceful and present low odds of political instability. Canada accounts for about 44 percent of the company’s gold output, with another third generated in Mexico. Neither country is even remotely at risk of resource nationalism.
Another top gold stock pick is Sandstorm Gold (SAND). This company boasts a great management team and solid earnings growth potential. Even if gold prices were to stay flat, this stock could continue to grow earnings.
Sandstorm was started only a few years ago by the first employee of Silver Wheaton (SLW), then 26-year-old Nolan Watson. Watson built Silver Wheaton, now the world’s largest precious-metals finance firm, into a $10 billion market-cap company.
After making a name for himself at Silver Wheaton, Watson left to start Sandstorm Gold, which is similar to Silver Wheaton but does deals in gold instead of silver.
Sandstorm Gold acts more like a bank than a gold miner. For example, it pays mining companies $20 million up front in exchange for a percentage of the miner’s total gold production for the life of the mine, plus any additional exploration upside, all at a fixed cost per ounce of gold.
While many gold miners struggle to protect their profit margins from rising input costs, Sandstorm Gold never pays more than $400 to $500 per ounce due to its gold stream agreements.
This fixed cost is what makes this company and the business model so special.
With an employee headcount of only 15, it’s also one of the most efficient business models.
The business model allows Sandstorm Gold to generate enormous amounts of free cash flow and then to reinvest the cash into more gold streams to grow quickly. Sandstorm Gold can continue to grow rapidly with little or no debt, which is rare for a company in the resource sector.
Sandstorm Gold now has cash flowing from five gold streams, with more streams in the pipeline expected to come online by the end of the year.
Sandstorm’s pipeline is already loaded with growth from future streams and the company also will benefit from expansions in production from current streams.
Even if gold prices were to stay flat until 2016, Sandstorm Gold’s earnings would still double just because of existing streams already producing or ones in the pipeline that will come online.
This assumes Sandstorm Gold does not reinvest its profits into any more gold streams. The company also plans to start paying a small and growing dividend in 2015.
Sandstorm Gold’s stock has a good shot at tripling to over 40 over the next three to four years depending on several contingencies: gold price trends; when the company starts paying a dividend; how many new gold streams are bought; additions to the growth pipeline; and whether existing gold streams are successfully expanded. See our free report, for more of our favorite precious metals investments.
This article was written by Jason Burack of Investing Daily.
Stocks Discussed: GG, SAND, GLD,