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Euphoria in Gold's Price Elevates Miners

Source: Wikimedia Commons.

Almost a month after a rout in the price of gold sent mining stocks tumbling, a rally in the precious metal had them surging as doubts about the viability of the so-called economic recovery has investors thinking the Federal Reserve will continue to maintain its easy money policies. The best performer was El Dorado Gold (NYSE: EGO  ) , which jumped 9% on the day, while Yamana Gold (NYSE: AUY  ) and Kinross Gold each closed the day about 6% higher. 

The veneer of better jobless claims and regional manufacturing data was not enough to convince Fed directors they shouldn't keep their foot on the gas pedal for keeping interest rates near 0%, even if it meant igniting inflation later on. Rising prices are already being felt across the board, but Chairwoman Janet Yellen essentially shrugged at the impact that would have on the working class and said we need zero-interest-rate policies now and well into the future.

Despite years of throwing shovelfuls of money into the economy at a steady pace, the Fed has been unable to help it find its sea legs, and the sharp revision downward of economic growth for the first quarter to contraction (because of the weather!) is seen as evidence that the disastrous policies of the past five years are needed today and tomorrow. 

When the carnage was ripping through the gold sector last month as the precious metal plunged and the miners followed suit, I suggested there was still a rally to come, that the economy was not what it seemed, and that investors might want to buy gold mining stocks, if not gold itself. A little over three weeks later, and the price of gold closed trading last Thursday at $1,320 per ounce, up $43 per ounce on the day, putting it back at levels it hasn't seen since April and turning in its best performance since last September. As a result, SPDR Gold Shares have gained almost 10% this year, while even silver was able to claw its way back over $20 per ounce, also the first time in two months it has seen that level.

Though more subdued, gold miners themselves were the beneficiaries of renewed interest in their prospects. It's not surprising Yamana was a favorite, as it recently won the battle against Goldcorp (NYSE: GG  ) to acquire Osisko Mining and gain access to its lucrative Canadian Malartic mine in northern Quebec. In partnership with Agnico-Eagle Mines, which was up over 5% on the day, the proud new owners can expect to see the largest producing gold mine in Canada produce some 600,000 ounces of gold this year.

While the odd man out in the deal gained just under 5% on the day, Goldcorp remains well situated to take advantage of the improved outlook and is expected to produce around 3 million ounces of gold. Its liquidity position is strong, with $1 billion in cash at the end of last quarter, and with capital spending projects winding down, expenses should moderate next year. Its Cerro Negro project in Ecuador is expected to begin producing within the next few months, Eleonore in Canada should start later this year, and Cochenor should be producing by year's end. By not overpaying for Osisko, Goldcorp has maintained its fiscal responsibility.

Barrick Gold (NYSE: ABX  ) as more subdued, rising about 3.5%, as talks of partnerships with China National Gold, the country's state-owned miner, continue to swirl, though any joint effort would not include Pascua-Lama, the idled mine straddling the Argentina-Chile border that remains mired in controversy and lawsuits. Still, the prospects there look better than they have for a while, and Barrick has signed memorandums of understanding with the indigenous people in the region that at least gives it a framework for moving forward.

Although there was euphoria in the gold markets yesterday, we've seen such quick spikes give way to gloom again in the past. But 2014 is turning into a banner year for gold miners, with the likes of Agnico-Eagle up 41%, Goldcorp up 28%, and Eldorado, which is close to starting mining activities in Romania, 25% higher. Even so, they're well below their peak valuations and ought to be seen as intriguing investments still. With the Federal Reserve stoking conditions for economic ruin, gold and its miners continue to glitter with potential.

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Rich Duprey

Rich has been a Fool since 1998 and writing for the site since 2004. After 20 years of patrolling the mean streets of suburbia, he hung up his badge and gun to take up a pen full time.

Having made the streets safe for Truth, Justice and Krispy Kreme donuts, he now patrols the markets looking for companies he can lock up as long-term holdings in a portfolio. So follow me on Facebook and Twitter for the most important industry news in retail and consumer products and other great stories.


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9/4/2015 4:00 PM
ABX $6.41 Down -0.07 -1.08%
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