Barrick Gold Corporation (USA) (ABX), New Gold Inc. (USA) (NGD), Eldorado Gold Corp (USA) (EGO): How to Play the Spike in Gold

Page 1 of 2

It was a little over a month ago that gold was plunging, sending investors into a panic and driving gold miners’ share prices to new 52-week lows. This sell-off saw gold at a low of just over $1,200 per ounce with naysayers speculating that it would fall to under $1,000 per ounce.

What is the outlook for the price of gold?

Much of the speculation was based on the belief that the Fed would start tapering its quantitative easing program earlier than expected. This has artificially reduced interest rates near zero while injecting billions of dollars into the U.S. economy through a bond-buying program.

It was also based on better than expected economic data coming out of China and the U.S. But with the Fed now providing clearer guidance as to when and how that winding down will take place, much of the panic has subsided.

This, combined with growing civil unrest in the Middle East, has caused gold prices to spike, now up by almost 8% to around $1,415 per ounce for August. Gold mining stocks have made a sharp comeback over the last two weeks as a result. However, there is still considerable uncertainty as to whether this is a sustainable rally or a short-term price spike driven by geopolitical events.

Regardless of the short-term direction of gold, there are a range of factors that indicate a price floor has been created. And that’s because gold supply will fall with the majority of miners having slashed exploration and development programs during the second quarter of 2013.

While central bank buying is uncertain, there is still strong demand for jewelry, gold bullion, and coin investment. In the second quarter of 2013, jewelry demand climbed 37%, while gold bar and coin investment soared by 78% year over year. Despite the rise in the price of gold and the rally among mining stocks, the group has underperformed due to rising crude prices.

This is because gold miners are stocks first and a leveraged play on gold second, with gold mining being an energy-intensive activity. Accordingly the cost base of gold miners increases as energy costs rise. For August alone, crude rose 3% to well over $100 per barrel. Given the energy-intensive nature of gold exploration, mine development, and gold production, this has caused production costs to rise.

Barrick Gold Corporation (USA) (NYSE:ABX)

How to play the spike in the price of gold

The best way for investors to play the spike in gold and the ongoing uncertainty facing gold miners is to identify those miners that are undervalued, with a low production cost per ounce of gold. Typically, the highest-cost gold miners are those that are reliant primarily on underground mines to produce gold, while open cut mining is far more cost effective.

The world’s largest miner, Barrick Gold Corporation (USA) (NYSE:ABX) is one of the lowest-cost producers in the industry with an all in sustaining cost of $919 per ounce of gold produced.  For the second quarter 2013, Barrick reported particularly disappointing results, but this was to be expected by investors because of the difficult operating environment. It also slashed its dividend by 75% further disappointing investors and driving a sustained sell-off of its shares.

This has made Barrick Gold Corporation (USA) (NYSE:ABX)’s valuation appear quite appealing, with it now trading wiith an enterprise-value of only four times its EBITDA. But impressively for the same period Barrick grewe its gold production by 4%, leaving Barrick well positioned to take advantage of any increases in the price of gold.

Furthermore, Barrick Gold Corporation (USA) (NYSE:ABX) cleared the decks by taking a $5 billion charge against the value of its troubled Pascua-Lama mine, and commenced the divestment of a range of non-core assets. This leaves it well positioned to focus on its core gold producing assets so it can build value for investors.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 10 Countries with the Highest Suicide Rates

The 10 Most Technologically Advanced Countries in the World

The 10 Safest Countries in the World to Live in Peace

The 10 Top Selling Smartphones in the World 2014

The 12 Biggest Shopping Centers in the World

The 10 Friendliest Countries in the World

Qihoo 360 Technology Co Ltd (QIHU), Actavis plc (ACT), Yahoo! Inc. (YHOO) Among 20 Long Ideas from Sohn Canada

The 10 Laziest Countries in the World

The 10 Most Polluted Countries in the World

The 10 Most Dangerous Cities in America 2014

The Top 10 Gold Producing Countries in the World

The 10 Tallest Buildings in the World

The 10 Richest Stand Up Comedians in the World

The 10 Fattest Countries in the World

The 5 Best Summer Jobs for Teens

The 10 Most Religious Countries in the World Keeping the Faith

The 10 Most Educated Countries in the World

The 10 Most Popular Cell Phones in the World

The 10 Drunkest Countries in the World

The 10 Most Expensive Private Schools in the World

The 10 Smallest Countries in the World

Walking Dead Season 5 Spoilers You’ll Wish You Didn’t Know

The 10 Poorest Countries in the World

The 10 Greenest Countries in the World

The Top 10 Countries with the Highest Population in the World

The 10 Most Visited Countries in the World

The Top 10 Star Wars Characters in the Iconic Series

The 10 Most Expensive Android Phones in the World

5 Reasons Why The Illuminati Is Real and a Threat to Society

The 6 Scariest Halloween Costumes Ever Screamed At

The 4 Biggest Hedge Fund Managers in the World Today

The 15 Most Densely Populated Countries in the World

The 10 Biggest Tea Drinking Countries in the World

Top 6 Ways to Improve Your Checkout Process and Close Sales

The 5 Most Profitable Online Businesses You Can Start Today

The 20 Most Profitable Hospitals in the US

The 5 Most Profitable Home Businesses to Start

The 7 Teams that Will Win the Stanley Cup in 2015

The Top 10 Most Expensive Digital Cameras to Snap Stunning Shots With

The 10 Highest Quality Fast Food Restaurants In America Today

The 8 Best Halloween Decorating Ideas to Spook Up Your House

10 Marvel Women that Should Get a Movie Right Now

The 20 Best Remixes of Popular Songs that Will Make You Forget the Originals

7 Most Expensive Cities in the World

5 Least Expensive Cities in the World

10 Celebrities Who Believe In Scientology

10 High Margin Food Products to Build a Business Around

The 10 Most Expensive Clothing Stores in the United States to Get Decked Out At

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!