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The Gold Stock Strategist analyzes leading junior gold producers and major gold mining companies.

Comments are welcomed!

Wednesday, September 16, 2009

Gold Breaks Out: Expected to Challenge All-Time High

The price of gold is breaking out to an 18-month record, rising as high as $1023 this morning amid renewed inflationary expectations and a weak dollar. Improved confidence in the global economy remains high after reports suggest the recession is over. Positive economic data and a falling U.S. dollar are sparking a rally in global equity markets. As a result of growing expectations for a stronger economy, investors are moving into gold as a hedge against inflation.

Positive economic data include strong retail sales in August rising 2.7% from the prior month, a higher-than-expected U.S. producer price index rising +1.7% month over month in August. Core consumer price inflation is still constrained as this morning’s August report showed that core consumer price index (CPI) remains steady with a 0.1 percent gain, meeting the consensus forecast. The headline CPI surged 0.4 percent on higher energy costs in August — also matching economist’s expectations.

Though the core CPI remaining low at an annual pace of 1.3%, inflation remains a concern for investors. Even despite reassurances by central bankers from major economies that inflationary pressures remain tame, investors are concerned policymakers would have difficulty in making an efficient exit from the extraordinary stimulus measures adopted last year. If the exit strategies are not timed well, the global economy is at risk of falling into extraordinary inflation.

Just last week, former Federal Reserve Chairman Alan Greenspan stated, “Gold prices that jumped above $1,000 an ounce this week are signaling that investors are buying metals to hedge against declines in currencies.” Greenspan indicated that gold’s gains are “strictly a monetary phenomenon … an indication of a very early stage of an endeavor to move away from paper currencies.” Mr. Greenspan concluded, “What is fascinating is the extent to which gold still holds reign over the financial system as the ultimate source of payment.

Gold is expected by many analysts to challenge its all-time high of $1,035 based on investor concern for higher inflation. Many fund managers and self directed investors have been gaining exposure to gold through ETF Gold Shares (GLD) or through the gold miners using indexes like the Market Vectors Gold Miners ETF (GDX) and the Gold Bugs Index (HUI). Companies included in the indices include Barrick Gold (ABX), Newmont Mining (NEM), Goldcorp (GG), Yamana Gold (AUY), Agnico-Eagle (AEM), and Kinross Gold (KGC).

Spot gold is trading at $1,017 an ounce at 11:05am this morning, up almost $10 an ounce for the day.

Disclosure: No Positions

Monday, September 14, 2009

Barrick De-hedging is Latest Move in a Modern Day "Gold Rush"

The world's largest gold producer, Barrick Gold, announced last Tuesday it intends to pay off its entire book of fixed price gold hedges and a portion of its floating hedges to gain greater exposure to the market price of gold. This move is very bullish for Barrick's share price despite the issuance of new shares and dilution for current investors.

It's also another very strong signal from sophisticated operators who know the gold market best--gold mining company executives. These operators have the most on the line when they move from the certainty of having future production sold at locked-in rates to an environment in which their fortunes are fully leveraged to the price of gold.

Barrick's de-hedging action is the latest move in the modern day "gold rush" by gold producers to reduce or eliminate gold hedges. In the past year, several companies have significantly reduced their gold hedge book including Newmont Mining (NEM), AngloGold Ashanti (AU), Lihir Gold (LIHR), Sino Gold, Newcrest Mining and others. Barrick (ABX) already reduced its own gold hedge book by one million ounces last year.

Barrick’s share price has been lagging peers because of the rising spread between its gold hedge price and the spot market price. As the price of gold continues to rise, opportunity cost is rising because of the increasing spread between the hedge price and the spot market price for gold. De-hedging enables Barrick's future earnings and current valuation to grow with the price of gold.

Barrick had 3 million ounces of gold in fixed price hedges and 6.5 million in floating hedges for a total of 9.5 million ounces of gold hedged—representing 128 percent of Barrick’s annual production for 2009. Barrick’s projected production for 2009 is 7.4 million ounces of gold.

The gold hedges contractually obligate Barrick to sell its production at an average of about $396 per ounce, guaranteeing certainty in cash flow for the company from 2011 to 2019. In a rising price of gold environment, investors see the negative impact on earnings because the company had committed to sell gold production at prices much lower than the current spot price.

Critics of the move point to the dilution caused by the de-hedging, ignoring the boost to future earnings with rising gold prices. The critics would do well to understand two things. First, the market has already priced in this growing hedge book liability. As a result, de-hedging has a positive impact on the company's share price with improved leverage to the price of gold. The hedges were primarily dedicated to the development of the Pascua-Lama project in Chile, the largest green fields gold mining project in the world. As Pascua-Lama comes on line, overall profitability should increase as Barrick sells production at a much higher price than the original hedges.

Secondly, the price of gold is in the middle of a long-run bull market. Extraordinary fiscal and monetary policy measures enacted since the global financial crisis of 2008 are likely to create pressure for higher price inflation in the future. Gold is a traditional hedge against price inflation and likely to increase in value. Gold producers can expect to benefit as a leveraged play on the rising price of gold.

Barrick's initial de-hedging plan was announced on September 8 to raise $3 billion from a share offering at $36.95 a share. Proceeds will be used to pay off the Company's gold hedges. On Thursday, September 10, Barrick released news that underwriters RBC Capital Markets, Morgan Stanley (MS), J.P. Morgan Securities and Scotia Capital exercised an over-allotment option, enhancing the entire agreement to $4 billion. As a consequence of the financing, Barrick's common shares outstanding will increase to roughly 982.7 million from about 874 million currently—a 12.4 percent share increase.

The company will incur debt for the remaining $1.6 billion needed to close out the hedge agreements for a $5.6 billion charge to shareholder equity in the third quarter. The gold hedge contracts will be closed over the next 12 months.

In terms of scale and effect, Barrick's move to de-hedge the fixed price contracts alone (3 million ounces) is equivalent to reducing total annual global production of gold for all gold producers by about 4 percent. The additional floating price hedges (6.5 million ounces) represent an additional 7 percent of annual global gold production for a grand total of 11 percent of annual global production. This is very bullish for gold going forward and a key reason the price ended last week above $1,000 an ounce, the highest end-of-week close ever.

Barrick Gold is more attractive to investors with this action now that the company is increasingly leveraged to the price of gold.

Disclosure: No position


Barrick Gold, already up over 7% since July 31 after an initial recommendation by the Gold Stock Strategist newsletter, has the sixth highest return among the newsletter's overall model portfolio of 9 current and emerging gold producers.

Thursday, September 10, 2009

Gold Stock Strategist Newsletter Launched

Many of you may have noticed that last week I launched the Gold Stock Strategist Newsletter at Self Directed Investor. The launch was accompanied by this press release.

For those who have been following the Gold Stock Strategist blog for the past 18 months, it may be a surprise that my work here has developed into a subscription service analyzing gold producing companies. It was a surprise to me too as several investors and researchers have offered to pay me to analyze gold mining companies based on their specific data needs. What we’ve learned over the past months is that the demand for data and opinions on gold mining companies has increased sharply since the near collapse of the global financial system. Liquidity is returning to the markets amid extraordinary stimulative fiscal and monetary measures. All asset classes have benefited since the March 9, 2009 market lows, but especially gold.

Gold remains in the middle stages of a long-run bull market. The U.S. and other industrialized nations are in the throes of an unsustainable debt bubble. Historically, gold has been a major beneficiary as government planners artificially boost demand with inflationary fiscal and monetary policies. The outcome of this script is predictable. The price of gold will trend higher and gold producing stocks will enjoy outsized returns because of the leverage they enjoy to the price of gold.

Despite a negative consumer price index (CPI) over the past 12 months, higher inflation is a likely byproduct of extraordinary government spending, borrowing, and money creation. And that is why gold producing companies are currently attractive values going forward over the next months and years. Of course, some are better values than others. The Gold Stock Strategist Newsletter recommends what I believe are the best companies to invest in whether you are a conservative, growth, or speculative investor in gold producers.

In each issue of the Gold Stock Strategist, subscribers enjoy my latest research and specific buys and sells. I'll also let you know when it's time to lighten up on gold producers. Gold stocks do not move in a straight line even as gold prices trend higher amid volatility. There will be inevitable corrections — especially in a dynamic global financial environment.

To give you a flavor for what the newsletter is all about, below is the first page of the August 2009 issue for your review.

(click to enlarge)

If you have benefited from reading the Gold Stock Strategist blog over the past 18 months, I think you will thoroughly enjoy the newsletter. The newsletter and a free report, "Gold Stocks 101: Understanding the World of Gold Stocks and Why Now is the Time to Own Them..." are available here, at the Self Directed Investor.

As most of you have already noticed, the Gold Stock Strategist blog has been integrated into the Self Directed Investor website since mid-August. For those who haven't visited Self Directed Investor yet, just click on the web site header above or just click here.

For those who have already visited Self Directed Investor, I encourage you to take another look. We have introduced a new feature with the addition of “SDI Twits.” My “goldstrategist” Twitter account will regularly "tweet" news about the gold mining industry and companies covered in the newsletter. Other hand-picked investors will also be "tweeting" on Self Director Investor as well.

Thank you for your support of this blog.

Good luck in your gold stock investments!

Tuesday, September 1, 2009

Gold Prices Rise Against Trend

Spot gold prices finished 0.5 percent higher on Tuesday ending at $956.50 an ounce after the Institute for Supply Management’s manufacturing index beat consensus estimates of 50.5, rising from 48.9 in July to 52.9 for August. The ISM manufacturing index knifed through the 50 level for the first time in 19 months — signaling expansion in U.S. manufacturing.

Gold is considered a hedge during times of high inflation and economic uncertainty, and its price generally follows crude oil prices and moves opposite to the U.S. dollar. The yellow metal rose in spite of a sharp drop in U.S. stocks, a strengthening dollar, and lower oil prices. Silver advanced as well to over $15 an ounce.

U.S. equity markets were down over 2 percent today. Crude oil prices slipped over 2 percent, reaching a two week low. The U.S. dollar showed strength by rising 1 percent against the Euro based largely on both positive U.S. manufacturing news and the perception of increased risk in global markets.

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