Gold prices have been on the move recently, rising more than 10% so far in 2015 and popping over $1,300 an ounce for the first time since last summer. Investors have turned to what are considered “safe” assets, like gold, amid the buzz about quantitative easing in Europe and stimulus from other central banks around the world as well as concerns over slower economic growth around the world.
I’m not what you would call a “gold bug,” but I do recognize that the commodity plays a fundamental role in global monetary markets. And when investors get nervous, the gold prices almost always rise.
Gold prices have come back strong from around $1,150 in early November to $1,300 today, so it looks like the threat of continued deterioration is behind us for the time being.
There is a reasonable chance gold prices will continue to rise but, as a trader, I’m more comfortable looking at very specific situations rather than trying to play gold broadly. For example, a lot of gold companies can be quite risky. Some of them are hedged, and their cost structure prohibits them from moving parallel with gold prices
I’m more interested in stocks that were oversold after gold’s long run of weakness and poised for an outsized bounce in the more bullish environment. One that I recommended recently in my Inner Circle service was Barrick Gold Corporation (USA) (NYSE:ABX). When I recommended it about six weeks ago, gold mining stocks had suffered exaggerated losses. An ounce of gold was 8.7% cheaper than it was in mid-August, but shares of ABX, the world’s largest bullion producer, were down 36%. ABX has bounced back 16% in the last month, and the chart shows room for additional upside.
The key here was not gold prices – even if precious metals went nowhere in the immediate future, Barrick Gold is using its time to strengthen its balance sheet and wring additional value out of its mining assets. Expensive development projects are on hold, but while Wall Street expects revenue to drift over the next few years, the earnings trend is turning around already.
ABX won’t report earnings until Feb. 18, but analysts agree that the company will return to last year’s levels of profitability here in the first quarter of 2015. After that, the comps look spectacular, largely because so much of 2014 was difficult for the mining sector. This could be a growth stock once again by summer, justifying richer multiples and faster appreciation than the broad market. Keep in mind that the Street already accepts that management’s goal here is to shrink the operation to emphasize only the leanest and most profitable assets, while cashing out of everything else.
As risks increase throughout the global financial markets, precious metals have recovered their age-old allure as a hedge against disaster. Now that historical resistance has melted, this position has more upside potential. In fact, the next technical ceiling on ABX’s chart is all the way up above $15. While I am not necessarily counting on gold prices to rally that much in the near term, truly anything is possible with ABX as undervalued as it was in December.
ABX seems to be transitioning from reflexive oversold bounce into full-fledged recovery, and I view the stock as a good buy below $13.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network, and other media.
