ith prices breaching $1,600 this morning, the steady trend higher in gold must finally be hard to argue with, even for the most vociferous cynics of the barbarous relic. Riding the 45-degree angle and rolling waves of its 50-day moving average, and always finding strong support near its 200-day just below that, the yellow metal looks a lot more precious than barbaric in the era of quantitative easing.
For those who still doubt the power of the gold trend, the research team at DailyFX.com had a nice little chart (see video accompanying this article) to characterize that gold's volatility has only added to its bullish bias. In other words, every sharp pullback from new all-time highs since 2009 has been met with an equally violent rally.
Surge and Correct, Like Any Mega Trend
They highlight the two big rallies of the past year that saw surges of about $275. The July to December 2010 move was after record highs that touched $1,265 in June of last year and then quickly fell back to $1,156. From that low, a new high was reached at $1,431 in less than five months.
Then correcting back to $1308 through December, another 20% rally occurred from January to May of this year before $1,575 became the new high-water mark. I would add the $222 rally that occurred prior to these two when, after hitting new highs just above $1,225 in November 2009, gold dropped to $1,044 and then marched to the June 2010 zenith of $1,265.
In short, it's been a strong bullish zigzag higher where the dollar amounts seem enormous, yet the actual corrections and volatility -- when measured in percentage terms -- have been far tamer than your average stock. Assuming history will repeat itself (it clearly likes to), the DailyFX gang thinks this current rally will get us to $1,750, probably this year. And from the looks of the move in the past two weeks, they might be on to something.
Inflation Expectations Floating on a Sea of Dollars
What's driving this precious advance? A lot of it is simply dollar debasement at the hands of quantitative easing. Throw in the increasing interest from serious investors looking for diversification in an alternative store of value -- i.e., hard assets instead of paper ones -- and the proliferation of vehicles for them to use, from the GLD ETF to hedge funds, and you can see the momentum is real and probably not going away for some time.
The other factor is less speculative and more economically-sensitive: inflation. Even if you don't think inflation is on the rise, but all your neighbors do, if you are an asset manager you have to seriously consider if you may need some protection. Many portfolio managers are building exposure to gold even while they maintain an overweight allocation to stocks.
And often it's not the reality of the fundamentals in an investment thesis that makes the difference. It's the perception and actions of other market participants that can drive trends whether they make sense or not.
Digging for #1 Gold Stocks
So, while this is not an argument for going out blindly and purchasing exposure to gold, if you are going to seek some, there are some things to look for in the equities that derive their earnings from it. First, you want earnings momentum, just like with any stock.
The three names below have all recently benefited from upward analyst estimate revisions, the strongest leading indicator of earnings momentum.
Barrick Gold (ABX - Analyst Report) has been the big name that has gone nowhere this year despite gold's advance. Long considered the huge miner with lots of old hedging obligations (via forward contract sales) much below the current market price, Barrick fights to get above it's 200-day moving average and is trading near where it was in December 2009.
In April, because Barrick and two other big miners comprised 35% of the Market Vectors Gold Miners ETF (GDX), I did a pairs trade where I bought gold through the SPDR Gold Trust ETF (GLD) and sold calls on the GDX. I wrote about this last month in "Mining for Top Gold and Silver Stocks." Though ABX has some earnings growth now and has recently seen upward estimate revisions to give it a strong Zacks Rank, that growth is currently still in the single digits. Thus the Zacks Recommendation is Neutral.
Gold Fields Limited (GFI - Snapshot Report) appears to be the standout here with strong double-digit earnings growth and an attractive P/E multiple. It is also one of the world's largest unhedged gold producers with operating mines in South Africa, Ghana, and Australia.
As a Zacks #1 Rank (strong buy), the high-probability bet is for GFI to outperform its peers. The Zacks Recommendation reflects this with an Outperform rating.
Using Earnings Momentum in Metals Stocks
If you want to ride the wave of gold higher, and you want to use the miners to do it, these are the kind of precious metals stocks you want to dig for. Evaluating all the particular fundamentals of one miner versus another can be complicated. Who hedged when and at what price? Who's got production problems from country-specific political, labor, or environmental obstacles?
For example, Agnico Eagle Mines (AEM - Analyst Report) is currently a Zacks #5 Rank (strong sell) due to sharply lower earnings estimate revisions after a fire destroyed some production facilities.
Comparing the one apples-to-apples metric that aligns all the others can help you see past the miners' luster, or lack of it. Earnings momentum is that metric and you can check it every day on the Zacks Estimates page with tables that break down the data in terms of key windows like analyst agreement, the magnitude of revisions, and surprise history.
Or you can just follow the Zacks Rank and Recommendation. Either way, following earnings momentum and trends in analyst estimate revisions puts the odds in your favor to follow the money to more trading profits, regardless of which way gold goes
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