Gold stocks as the answer to many questions
Those who turn to gold in times of trouble, says this Canadian analyst, may find the best choice is up-and-coming gold stocks, like these eight.
The answer is gold.
The question is — what do people turn to when they can’t get answers to any of the other questions?
Such as, will debt in Europe lead to a second credit crisis? Will China slow down and stop ordering our commodities? Will a Canadian team ever win the Stanley Cup again? (Sorry, that one’s too tough for anybody to answer.)
The only trouble with the answer is that it begs another question. What type of gold do you turn to?
The price of gold may have pushed to record highs, but the price of gold stocks has not followed suit.
To help sort it out, we turn to one of Canada’s most seasoned analysts, Mr. Carlyle Dunbar. He believes we are in a long-term bear market (unlike some others who are convinced that we are going through a rough patch in a long, or secular, bull market).
Writing in Investor's Digest of Canada, Mr. Dunbar outlines the condition of the market as he sees it and recommends a group of up-and-coming gold stocks that offer “the best opportunities for gain.”
Recipe for least risk
After yesterday’s dust had settled, the price of gold had risen by $4 to US$1,198 an ounce. As we write today, it has shot up again and sits at over $1,214.
But if you’re looking for a market signal, says Mr. Dunbar, look to the bond market. “So far, bonds have resisted the argument that severe inflation is coming. On the contrary, the bond market’s behavior argues in favor of deflation.”
The European debt crisis has sent money flowing into U.S. Treasuries and the American dollar as a “safe haven.” This haven may turn out to be illusory, thanks to the enormity of the U.S. deficit, but that’s just another question waiting to be answered.
In the meantime, the volatility is very real, and investors must protect themselves, says this analyst.
“So the recipe for least risk in an investment portfolio includes shorter-term and medium-term bonds, some gold exposure and dividend-paying companies with strong cash positions. Seasoning and proportions according to taste.”
Rising gold producers
When he speaks of dividend-paying companies, Mr. Dunbar means a selection of Canadian blue chips, of course. But he also believes that several rising gold producers will become dividend payers as well.
He has made the case for these stocks before (see Daily Buy-Sell Adviser, April 14). In this article, he updates four stocks that were featured last month. Then he adds four more.
Detour Gold Corp. (TSX-DGC) is set to start pit production at its property near Cochrane, Ontario by 2012. The stock was at $19.76 in mid-April and is now trading at $22.55.
Rubicon Minerals (TSX-RMX), which is headed for production in the prolific Red Lake greenstone belt in northwestern Ontario, traded at $3.98 five weeks ago. It has slipped back in the market sell-off, to $3.48.
PC Gold (TSX-PKL) broke out of “penny stock” range to rise as high as $1.71 after the announcement of an “extra-special drilling result” at its Pickle Crow property. It has since settled back to $1.19.
Premier Gold (TSX-PG) has had good news from a joint venture at Red Lake with Goldcorp (TSX-G). Trading at $4.19 in mid-April, it has moved ahead to $4.64.
Four more gold stocks
Mr. Dunbar discusses four more gold stocks he likes. He begins with two companies that dominate the Kirkland Lake, Ontario gold camp and its seven former gold mines.
At the west end of the camp is Kirkland Lake Gold (TSX-KGI). This company’s shares had been in a downtrend. But they have reversed course sharply, going from just over $3 two weeks ago to $7.95 today.
The east end of the camp belongs to Queenston Mining (TSX-QMI). It has the best recent drilling news, but its price has remained in a fairly narrow range for a month or so, and sits at $4.45. But “market price action suggests $10 as the likely upside target,” says the analyst.
San Gold (TSX/V-SGR) expects to add to its production at Rice Lake, Manitoba with some promising new drilling results. Its share price has risen by about a dime in the last two weeks, to $4.66.
Wesdome Gold Mines (TSX-WDO) is taking what it calls an “aggressive” approach to new drilling and development in its mines in Wawa, Ontario and Val d’Or, Quebec. Its shares have risen by 15 cents in the past two weeks, to $2.49.
All of these may be up and coming gold stocks, but will gold stocks in general get up and follow the price of gold?
Sling shot for gold
There are two ways to look at this question, says this analyst. First, it is not beyond the realm of possibility that the price of gold will crash.
Each time in the past five years that it has stretched more than 20 per cent above its 65-week moving average, a correction has followed. Gold breached that 20 per cent barrier in December.
It could pull back to US$1,000 an ounce, or even $700-$800 in the severest case. “Such an event would certainly panic the market,” says Mr. Dunbar, “but would not break the rising trend.”
As for gold mining stocks, he tells his Investor's Digest of Canada readers, they have trailed behind the price of gold since 1996, except for a strong flurry in 2000-2002.
But this should not discourage investors. This lag in prices creates a “potential sling shot for gold stocks. As and when they start to outperform gold, the leverage will be substantial.” And in that case, the rising gold producers have the potential to shoot the farthest.
Gold may not be the answer to every question in investors’ minds in these turbulent days, but it’s usually the answer to one query.
When everything else is going down, what goes up?
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