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5 Imminent Catalysts for Gold Stocks

Christopher Barker
February 8, 2011

Like an epic stage production, this multi-year bull market for gold and silver is supported by an enormous cast of characters that each contribute meaningfully to the final masterpiece.

By "cast of characters," I refer to the extensive set of fundamental drivers and catalysts that come together -- in highly dynamic combinations -- to propel this long-term upward trend through successive periods of breathtaking market outperformance. They're far too numerous to discuss at once, so perhaps the best we can do is to hone our focus on the actors that are most illuminated under the spotlight at any given point in time.

Before I shine my Foolish spotlight on five such catalysts -- which I consider attractively poised to drive gold and quality gold mining stocks substantially higher -- it bears mentioning that the lines between catalysts for the gold price and those for related stocks are hopelessly tangled in a web of interconnectivity. Because the investment approach that I recommend for this sector is very focused on the mining shares, I try to give you the most salient catalysts for their future outperformance, without regard for the unavoidable overlap with catalysts for the underlying metal prices.

The following are, by my own estimation (and in no particular order), five of the most immediate and identifiable drivers of likely outperformance from gold's mining stocks over the coming weeks and months:

1. These earnings results will dazzle audiences worldwide
Because fourth-quarter and full-year 2010 earnings results from this highly profitable sector have yet to hit the wires, I submit that awe-inspiring rates of earnings growth are poised to brazenly slap the face of a market that continues to underestimate the group's incredible profit potential.

Royal Gold (Nasdaq: RGLD  ) kicked things off for gold last week by posting fresh new company records for both revenue and free cash flow -- and a regal 90% increase in net earnings to $18.3 million. Miners may be hard-pressed to match this royalty company's astonishing achievement of converting 87% of revenue to free cash flow in its fiscal second quarter of 2011, but Fools can nonetheless anticipate a broad and bullish pattern of rapidly expanding profit margins, copious injections of cash flow to fund strategic growth objectives, and record-smashing bottom-line results that will finally command the accolades of even gold's most stubborn objectors.

Royal Gold's average realized gold price of $1,367 per ounce provides a yardstick for the sector's fourth-quarter revenue expectations, which can be applied to estimated operating costs for your favorite miners to yield a sneak peek at hurriedly expanding operating margins. For lower-cost producers like Eldorado Gold (NYSE: EGO  ) and my top pick, Gammon Gold (NYSE: GRS  ) , operating margins will have surged to $950 or more for each ounce of gold produced in the fourth quarter, representing roughly two-thirds of operating revenue.

Investors can also look forward to further enhancements of dividend payouts becoming more likely, going along with the industry's trend of expanding profitability. Not long after I singled out Agnico-Eagle Mines (NYSE: AEM  ) as the miner most likely to pursue aggressive dividend increases, that company announced a 256% increase to its quarterly dividend (to C$0.16 per share). While that still amounts to less than a 1% annualized yield, Agnico CEO Sean Boyd encourages investors to anticipate further gains, stating: "As we continue to¬†grow our gold output and increase cash flows over the next several years, our goal is to further increase our dividend yield."

Goldcorp (NYSE: GG  ) shares carry a similar yield, except with monthly payments that I also expect to rise substantially as the low-cost giant executes a 60% production growth spurt (to 4 million ounces annually by 2015). Goldcorp CEO Chuck Jeannes sees that growing volume coinciding bullishly with "a period of sustained cash flow expansion," helping to make Goldcorp this Fool's clear favorite among the more gargantuan miners of gold.

As you can see -- and contrary to the oft-repeated myth -- gold can pay dividends! Improving yields like these are likely to attract a fresh demographic of income-aware investors into the steadily growing fold of participants in this ongoing secular bull market.

2. Demand for gold remains in a global groundswell
Certain traders seemed to misinterpret the lyrics of Auld Lang Syne this year, forgetting their auld acquaintance with gold by triggering an abrupt liquidation to begin 2011. I view these periodic flushes of weaker, short-term-focused hands in the gold market as welcome opportunities for long-term investors to cement their positions.

Days later, a single hedge fund manager -- who had leveraged $10 million of capital into a juiced-up spread trade on COMEX gold futures totaling $850 million in value -- pulled the plug on his underwater bet. With a hint of pride in the sheer market breadth of his scantly capitalized position, Daniel Shak conceded: "Yeah, that was just me liquidating my spread position." I believe that this action further spooked a correction-wary gold market, and I personally consider it more than mere coincidence that the very next day the SPDR Gold Trust (NYSE: GLD  ) saw the largest one-day drop in its reported physical holdings since its inception in 2004.

These momentary, manic maneuverings by momentum traders, however, reveal nothing about the longer-term upward trend in worldwide investment demand for gold. Amid the sudden liquidation in New York, traders in London and Hong Kong were reportedly "stunned" by the scale of buying activity from China in January. London's Financial