Thanks to a bullish Federal Reserve outlook on the US recovery, the Australian dollar and gold stocks have made their first meaningful retraction for the first time this year. There are many logical explanations for the pullback but instead of applying method to the madness, investors should be looking for opportunities to pick up good stocks at reduced prices.
Until recently, I’d never been bullish on the gold miners. Perhaps it’s something to do with the fact that gold is fundamentally useless and the spot price can suffer irrational falls for no reason. But, since the beginning of 2014, I’ve begun to search for opportunities in this dirt cheap sector. It has been easier than I thought it would be to find golden opportunities (pun intended).
I’ve said it before, but after the worst fall in 30 years, gold miners are now looking very attractive. I’ve yet to put my money where my mouth is, but it’s been for a good reason – prices have gone up not down. I feel prices have become too rich given the likelihood of further falls in the gold price.
The two most promising gold miners on the ASX are Northern Star Resources Ltd (ASX: NST) and Silver Lake Resources Limited (ASX: SLR). Although they are both high risk, they offer vastly different plays on rising gold prices.
Silver Lake is rapidly growing production with expectations for it to rise by as much as 30% in FY14 on the back of an increasing level of reserves. On the other hand, Northern Star is a long-term play on rising gold prices. Recently, it used its superior balance sheets to fund acquisitions of rival gold producers. Such as that of Barrick Gold Corporation (ASX: ABX). Northern Star’s FY14 production could be 30% higher than last year’s, but my expectations are more modest.
Other gold producers – which I believe are unlikely to keep pace with the above two – yet present viable alternatives for rising gold prices are Regis Resources Limited (ASX: RRL), Newcrest Mining Limited (ASX: NCM), Ocean Gold Corporation (ASX: OGC) and Kingsgate Consolidated Limited (ASX: KCN).
Northern Star and Silver Lake are both extremely promising gold plays and today’s pullback in share prices is what I’ve been waiting for. Since the new year, they have risen 28% and 12% respectively, but with any luck they’ll continue to fall next week because of a recovering US economy and an improving outlook in global markets. I’ll look to add them to my portfolio if they do.
Remember gold, and gold miners’ share prices are countercyclical, so you want to pick them up when they’re out of favour. Look for companies which have the lowest ‘all-in sustaining costs’, high levels of reserves and flexible balance sheets. Both of the above companies exemplify these traits.
Motley Fool Contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies.
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