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Gold Stocks: The Great Contrarian Trade of 2014

By    |   Wednesday, 18 December 2013 01:38 PM

Gold stocks could be the ultimate contrarian trade of 2014, says one financial expert.

Specifically, look at stocks of junior gold miners, writes James Gruber in his weekly newsletter, Asia Confidential. The stocks are down about 80 percent from their 2011 peak, due to falling gold prices, production shortfalls, bad management and other reasons.

The situation has changed for the better since then, at least from the shareholders' perspective, says Gruber, a former fund manager and analyst. Bad managers are out. A quarter of CEOs at Canada's top 20 gold miners left office in 2012. Companies got spending under control, shut down uneconomic projects, increased dividends and set stricter return on capital projects.

"In sum, an undisciplined industry full of cowboys has had to shape up. And previously sleepy boards and shareholders are scrutinizing their every move," he observes. "Overall, the changes are very positive for future prospects."

Valuations are more favorable, he adds. Some companies factor in gold prices of under $700 an ounce, which limits their downside.

"Higher gold prices would just be gravy."

Production of some miners is uneconomic at current gold prices, but rising gold prices would boost their stocks. Others are exploring, but not yet producing, making them potentially the most rewarding, but the riskiest.

"The safest route is to invest in producing companies with long-life, low-cost assets," Gruber says. "Ideally, with shareholder-focused management and minimal debt. These companies may not benefit as much from rising spot prices, but will hold up much better if prices remain under pressure."

Gruber cites Medusa Mining, an Australian-based junior gold miner, and Novo Resources in Canada. The U.S. ETF of junior gold miners, GDXJ, is another option.

Gold faces a weak outlook due to supply and demand as well as technical reasons.

"Miners are facing a confidence crisis and juniors are the ones hardest hit," states the PwC Junior Mine 2013 report, citing falling market caps and poor cash positions. Some will have to accept mergers or takeover offers.

"When the recovery does come, investors will most likely put their money into the senior producers first, given their stronger balance sheets and proven production and profit-making capabilities," said PwC Global Mining Leader John Gravelle.

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Gold stocks could be the ultimate contrarian trade of 2014, says one financial expert.
Wednesday, 18 December 2013 01:38 PM
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