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Gold Miners Can Rally Even Without Gold: Weeden

The September rally in gold-mining stocks is already impressive: The group is up 14% month to date and 28% since the beginning of August. Over the same period, the SPDR Gold Trust(GLD) is up 4.5%, and nearly 10% since early August. That’s a reverse from several quarters of mining stocks trailing well behind the metal. As posted on Barrons.

Weeden & Co. strategist Michael Purves sees another rally in the works. He expects the Market Vectors Gold Miners ETF (GDX), which is up nearly one percent to $54.81 Wednesday, to reach $60 by December even if we see a mininal advance for gold. The reason: From a technical perspective, the trend of gold miners’ extreme underperformance versus the metal appears to be broken:

The gold/GDX ratio has been unusually elevated over the last several quarters, as gold has dramatically outperformed equities. We believe this metric has topped out and is poised for steady declines in favor of the GDX. … [A] small decline in [the implied GDX price as a function of gold prices] is actually more important than a major move in gold prices in terms of price realization. During much of 2010 and 2011, this ratio was at 25 or below. Recently – this ratio topped out at close to 40, a level approaching the all time extremes during the Lehman Brothers crisis…. This ratio has taken out support at ~34. Currently at 33, we are targeting 29 as our near term target ratio. Our near term objective for this ratio is 30 – a level that would imply nearly $60/share for the GDX with minimal increase in gold price.

The firm also has fundamental reasons to like the group lately:

During the last quarterly earnings season, most of the major miners missed on production and costs (nonetheless, virtually all of these stocks immediately traded higher subsequently). The most important developments during this season were the board directed actions of replacing CEO’s (Barrick and Kinross). These boards are effecting a key strategic transition away from large capital projects and towards generating free cash flow to their shareholders. The largest miners have quadrupled their capital expenditures over the last four years – a huge ramp up that facilitated the massive misses in production and costs that have become a hallmark for investors dissatisfaction. We expect more companies to solve for capex discipline, high dividends, and in turn reverse the negative sentiment in these equities.

Have a good one.

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Reader Comments (1)

Greetings Team, recently Endeavor (EDV) entered into an agreement to aquire Avion (AVR) of which I am a shareholder. I would greatly appreciate the teams opinion of the merger detailes and your opinion of the potential of EDV with the new AVR assets. As always great work and your insight is very much appreciated. Thanks in advance, Vincent

October 1, 2012 | Unregistered CommenterVincent

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