ABX, GG, and NEM – What is happening to the Gold stocks?

Back in the day, say 10 years ago, trading patterns in the gold shares where used to define macro predictions of future events.  Price signals mattered to a whole group of investors who forecasted increasing inflation, deflation, and direction of interest rates based on share price movements of gold shares. Granted any predictions were based on the use of regression analysis.  I have personally seen regression analysis on the price index of the TSX gold index, going back some 30 to 40 years having a near perfect correlation with interest rates.  I say, near perfect, because over the last 5 years with the increase in gold company shares, interest rates have decreased (significantly) instead of increasing.

It’s hard to have a discussion of this group (gold shares), without at least acknowledging the GLD.  Because of financial engineering, an ETF (exchange traded fund) was designed so investors could have a direct play in the price of gold bullion without the operational risk with may occur when buying shares of a gold mining company.

So the question of the day is whether the  collective fall in price of gold share companies actually mean anything in a macro context.  Specifically, are gold shares forecasting deflation ahead for the US and perhaps the world economy?  Or, with the invention of the GLD, gold mining shares are just operating companies with little to no predictive power.

I have pondering this question for sometime, with no real answer.  This is why I love the model price charts, because price signals weighted against model price and our Economic Book Values can give some clues about the future price action.

Look at three gold mining companies and see what our model price charts are telling us.

Barrick Gold Corp. (ABX)

Here is our chart.

Barrick Gold with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of ABX subsequent to this post will be maintained on Facebook, here.

EBV+2 is an important price point for ABX.  EBV +2 is $37.84US.  Certainly if ABX broke EBV+2, I think EBV would be a realistic price target ($26.07).  We have financial data on ABX going back 17 years.  ABX has only traded once at EBV, which occurred in the crash of 2008.

Newmont Mining Corp. (NEM)

Here is our chart.

Newmont Mining with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of NEM subsequent to this post will be maintained on Facebook, here.

EBV+2 is an important price point for NEM.  EBV+2 is $41.76US.  Same as ABX, if NEM broke EBV+2, I think EBV would be a realistic price target ($28.77).  Reviewing our financial data going back 17 years, NEM has never traded at EBV.

Please remember these are NOT predictions.  These are “what if’s” and probability.  Why invest in something unless you have a strategy or a plan?  That’s why model price charts can help with the “what if’s” questions.

GoldCorp Inc. (GG)

Here is the chart.

GoldCorp with weekly price bars, EBV Lines (colored lines) and model price (dashed line)

For those interested, a daily updated chart of GG subsequent to this post will be maintained on Facebook, here.

As you can see, GG has already broken EBV+2 or $39.84US.  I believe the probability is quite high that GG will trade at EBV sometime in the future.  Timing as always is everything – however we at least know the direction.  In the crash of 2008, GG traded as low as EBV-2 or $18.80US, using the March 31, 2012 balance sheet.

Conclusion

Are falling gold mining shares telling anything about our economic future?  History is always easier looking backwards.  Maybe gold shares are telling us something, maybe not.

Certainly with ABX and NEM, important support will be tested in terms of EBV+2.  If these two giants break EBV+2 then lower prices seem highly probable.  Maybe gold shares will be getting so inexpensive, that mining gold on Wall Street (in terms of M&A activity) will be more profitable than mining gold in the ground.

Like everything else in this market, this subject will be interesting to observe.

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