Less-Than-Shiny Gold Miners

NEW YORK (TheStreet) -- The precious metals rumor mill is in high gear once again. The contradictions are almost tantalizing.

The pantheon of gold gurus has a lot to say about this alluring symbol of wealth. On Friday the 13th (just that date alone can make some skittish) Goldman Sachs' ( GS) head of commodities research Jeffrey Currie said in a TV interview that gold is about ready to dip further as the U.S. Federal Reserve withdraws stimulus and economic data improve.

The investment bank suggests there's risk gold bullion may even fall below $1,000 an ounce. Does Currie know something we don't, or is he a part of the 66% of analysts who believe the Fed will start taking its foot off the bond-buying pedal sooner than later?

The debt-ceiling, the Syrian drama and other tempests in a teapot may support gold prices in the short term, Currie said in the interview, but he strongly suggested gold will resume its decline into next year.

He went on to say the firm's price target on gold for 2014 is $1,050, and during the ensuing correction the commodity may overshoot to the downside.

"While we agree with the mid-cycle price somewhere around $1,200, we believe that at least near term it can overshoot to the downside, which is why we have $1,050" as a target, Currie said. "It clearly could trade below $1,000."

So how will investors respond to this melancholic prediction? If they read reports like the one written by Research Specialist Peter Krauth at Money Morning, they may beg to differ.

Krauth wrote on Monday that "gold is set to surge." He claims one of the best indicators of the direction of gold's price is the Commodity Futures Trading Commission's Commitment of Traders (COT) report for gold.

His premise suggests that the commodity traders tend to move in tandem and that these speculators "...are almost always wrong at extremes."

"According to recent COT reports, speculators are so bearish on the gold price, their short positions are 70% higher than they have ever been throughout this 12-year secular gold bull market," Krauth explained.

His reasoning is based on the massive leverage that many futures contracts are traded on "up to 16 to 1 -- just a 6.4% rally in the gold price would obliterate all the capital of those fully leveraged contracts," Krauth postulates.

Just a small percentage rise in the gold price may lead to a massive short covering, "...which would feed on itself, pushing gold still higher and faster. Short covering rallies can lead to violent upside surges," he adds.

It's not hard to agree with his feeling that at the present time the negativity about gold hasn't been this great since gold's bull market began in 2001.

"After the extreme bearish sentiment of 2008, gold rallied 70% in a little over one year" Krauth reminded readers.

The View from a Contrary Perspective

There are only two things that get less respect than gold. Junk food and gold stocks are not high on any investor's food chain at the moment, and I'm not sure junk food isn't more venerated.

Take the world's largest gold producer Barrick Gold ( ABX). Shares of Barrick closed on Monday at $18.14, in spite of an analysis published by Two Fish Management valuing the company's stock above $44 a share.

Barrick estimates its gold production this year will be 7.2 million ounces, over two million more ounces than the next biggest miner, Newmont Mining ( NEM).

There are a number of chinks in its armor. Its net debt is around $13 billion versus Newmont's $5 billion. Plus, Barrick has earned a sour reputation for its capital expenditures and shaky leadership.

Let's take a look at both of these two famous gold producers, starting with a 1-year chart of ABX. The chart also includes its trailing twelve month (TTM) EBITDA earnings.

ABX Chart ABX data by YCharts

Barrick's earnings and sales growth depends on the price of gold staying afloat. In a recent interview CEO Jamie Sokalsky proclaimed, "This company has a more disciplined capital-allocation framework and is focused on cost control, portfolio optimization return on investment and free cash flow."

Newmont's one-year price chart with its TTM EBITDA earnings looks like the trajectory of a belly-flop dive off a high diving board. NEM Chart NEM data by YCharts

Many wonder if the gold miners can rejuvenate confidence among disenchanted investors. If Goldman Sach is correct about the direction of the price of the golden metal, that may be the final nail in the coffin.

If you decide to begin accumulating shares of ABX or NEM, it would be important to have a disciplined exit strategy that you can count on if shares head the wrong direction.

If the precious metals sector can feign death one more time, it may be the buying opportunity of a lifetime. Watch Barrick as the harbinger of the group. For those of us who are long the stock, let's hope a well-respected activist investor starts accumulating shares.

At the time of publication the author the author is long ABX and NEM.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Marc Courtenay is the founder and owner of Advanced Investor Technologies, LLC, as well as the publisher and editor of www.ChecktheMarkets.com.

Courtenay holds a Master's of Science degree in Psychology from California Polytechnic State University, and is a former senior vice-president of Investments for two major brokerage firms. He's been a fiercely independent investment "investigator" and a consulting contributor to the investment publishing world for over 30 years. In addition to his role as an investment publisher and analyst, he serves as a marketing consultant to the investment media industries.

In his role as a financial editor, he specializes in unique investment strategies, overlooked stock investments, energy and resource companies, precious metals, emerging growth companies, the prudent use of option strategies,real estate related opportunities,wealth preservation, money-saving offers, risk management, tax issues, as well as "the psychology of investing". Because of his training and background in Clinical Counseling and Psychology, he enjoys writing about investor behavior, the ¿herd mentality, how to turn investment mistakes into investment breakthroughs and the stock market's behavioral trends and patterns.


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