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Spot Gold Softens, Forms Bullish Golden Cross

Spot gold sold off towards the end of the trading session on Friday as traders squared positions in advance of President’s Day Monday when U.S. markets are closed. Gold stocks held up quite well with the Market Vectors Gold Miners Index showing a golden cross, a bullish breakout pattern formed from a crossover involving a security’s short-term moving average (such as the 15-day moving average) breaking above its long-term moving average (such as 50-day moving average) or resistance level. This chart feature is hardly definitive but coupled with other bullish indicators tends to support the thesis for higher gold prices this year.

What a difference a year makes for senior gold producers such as Barrick and Goldcorp, the former beating analysts’ expectations,  raising its dividend, lowering its unit production costs while at the same time projecting higher gold output (between 5.6 and 5.9 million ounces) for 2017.

Barrick’s net income for the quarter was $255 million after adjustments or 22 cents a share versus $91 million or eight cents per share reported in the fourth quarter of 2015. It’s taken a while but major producers such as Barrick appear to finally have come to the realization that bigger (in terms of ounces of annual production) is not always better but profit margin is.

The bloom seems to be back on Barrick as indicated by this 52 weeks NYSE trading chart:

 

During the last run up in gold prices to almost $2000 per ounce, gold producers squandered this price advantage by allowing

production costs to escalate and making a lot of bad investments in low grade gold deposits that simply exacerbated their production cost issues.

Not that long ago it seems Goldcorp benefited from the lowest unit production costs in the industry, mostly the result of its high grade underground mine at Red Lake Ontario where the mill heads were once running at over two ounces per tonne. Seems to me their costs were around $75 per ounce at one time.

Under the capable management of former Hudbay Minerals CEO David Garofalo, Goldcorp has also focused on reducing production costs which have climbed in recent years largely for the same reasons as its competitors. All in sustaining costs for the last quarter were $US747 per ounce and the company’s 20/20/20 plan projects that reserves will increase 20% over the next five years as will gold output, with production costs dropping by another 20%.

“In 2016, we undertook a significant restructuring to substantially grow the NAV per share of our company by decentralizing the business to drive accountability down to the mine sites, significantly reducing operating costs, selling non-core assets and reinvesting that capital into a robust internal pipeline and a new geologically prospective mining camp in the Yukon,” said David Garofalo.

With this type aggressive leadership from two of the world’s largest and most followed gold producers, we could well see a renaissance in gold mining shares that could easily eclipse past performance given the improvement in the industry’s balance sheets.

Turning to the more speculative side of the marketplace McEwen Mining made a takeover offer equivalent to $0.30 per share for an affiliated company, Lexam VG which has some strategically located holdings in the historic Timmins gold mining camp. You could have bought Lexam for a paltry five cents in December 2015 which is when yours truly loaded up the bank.

Here’s a nice chart from a generally liquid speculative stock that has been long overlooked in the marketplace:

 

While McEwen Mining arguably trades at a premium to its asset base and earnings, its CEO Rob McEwen, always treats shareholders fairly and Lexam shareholders were offered a share exchange that represented a 30% premium to market.

Lexam controls a cluster of four past-producing gold properties, both with open-pit and underground potential. The properties are located within the world-renowned Abitibi greenstone belt in proximity to the PorcupineDestor Fault Zone.

Lexam’s projects are situated within two claim blocks, one in the northern part of Tisdale Township (the Davidson Tisdale block located approximately five kilometres southeast of Timmins city centre) and a second block of contiguous claims comprising the Buffalo Ankerite, Fuller, and Paymaster properties located in Tisdale and Deloro Townships roughly nine kilometers to the east-northeast of Timmins city centre.

The “Trump factor” will no doubt continue to drive the gold market this year and beyond. It’s certainly done wonders for U.S. market indexes which haven’t seemed to factor in the prospects of his administration failing to implement Republican proposals to reduce taxes among other things.

What the U.S appears to be heading into is a debt-fueled series of policies that would see lower taxes, higher deficits, and subsequent dollar weakness as these policies are implemented. Trade wars with its main trading partners, China, Canada and Mexico will only make things worse.

In this political environment you really want to have some leverage to gold, either physical or stocks. Some of the base metals aren’t looking too bad either, with copper among the best bets, followed perhaps by zinc. Stay away from nickel whose market fundamentals are abysmal along with trendy industrial minerals (graphite/cobalt/rare earths…….) which are small markets that are subject to rapid decline when new production hits the marketplace.

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