Is Golds Correction Over?

Source: Adrian Day 12/09/2024

Global Analyst Adrian Day answers your questions and looks at gold buying patterns.

Gold has staged a very convincing recovery after the drop following President Trump’s re-election, closing Friday at $2,643, up from $2,563 two weeks ago. This suggests that there is a lot of pent-up buying from investors who missed buying all the way up. And, as I emphasized in my review of markets after the election (Bulletin #938), the fundamental reasons that different groups were buying gold over the past two years remain intact.

However, gold had risen 71% over a two-year period to the high at the end of October, with barely a pullback along the way. For gold to drop just 8% in two weeks, taking it back to where it had been trading just six weeks prior prompts the question: is that all there is?

It could mean that the pent-up buying is very strong or perhaps that the correction is not yet over. I would have felt far more comfortable if gold had dropped to the lower $2,500 area, a nice round number where there is some support on the chart, and churned around there for a few weeks.

On balance, I think we have seen the low of the correction. Certainly, I am holding and would be looking to add to the still very undervalued gold stocks, selectively and on weakness, while keeping some powder dry in the event of another down leg.

TOP BUYS in the week ahead include Barrick Gold Corp. (ABX:TSX; GOLD:NYSE), Nestle SA (NESN:VX; NSRGY:OTC), Lara Exploration Ltd. (LRA:TSX.V), Kingsmen Creatives Ltd. (KMEN:SI), Metalla Royalty & Streaming Ltd. (MTA:TSX.V; MTA:NYSE American), and Fox River Resources Corp. (FOX:CNSX).

Answers to Your Questions

Q. With the Mexican peso down about 20% in the last six months and the Mexican stock index down about the same, do you think there are some attractive buys in that market? What about other Latin markets that have fallen in recent months? – R. P., Texas

A. The Mexican market and current situation have been weak since the election of the new president there, following some last-minute shenanigans by outgoing president Lopez Obrador, who, in a parting shot, fired the entire Mexican judiciary. The new president, Claudia Sheinbaum, is a socialist but arguably a little more pragmatic than Obrador, known as AMLO. One of her first actions as president, however, was to abolish seven independent watchdog agencies, which critics say is a step toward consolidation of power and authoritarianism.

A Defensive Household Products Company

While not being overly aggressive on the market — there is the potential for further weakness ahead as the relationship with incoming U.S. President Trump gets established — I think there are some good buys.

I would emphasize defensive plays. Look at Kimberly-Clark de Mexico, which manufactures and distributes all the products the U.S. company does, including kitchen paper, tissues, diapers, and other personal care items that are likely to be bought regardless of the health of the economy and largely independent of the value of the peso.

The vast majority of the company’s sales are consumer products inside Mexico. Revenues have grown steadily over the years, from under MEX$47 billion in 2021 to over MEX$55Billion this year. Kimberly has strong margins and attractive returns (ROE of 136%), with the stock selling at just 10 times earnings and yielding 6.8%. At Mex$27.34, the stock is down from MEX$35 in mid August, and its lowest price (in USD) since 2009.

A Solid Bank With Earnings Growth

I would also start to look at Brazil, where both the currency and the market have dropped in recent months on concerns about the budget deficit. Indeed, the real fell to a record low last week. The market had been waiting for a plan to cut government spending, but when announced, it fell far short of expectations, with modest cuts offset by additional relief to poorer Brazilians.

Itau Unibanco (ADRs trade in the U.S. under the symbol ITUB) is a well-managed bank with broad exposure to retail, business, and commercial customers, that has seen steady growth in revenue and earnings. Earnings per share have increased each year from R$1.97 per share in 2020 to R$4.27 this year.

Again, the company has strong margins and returns (ROE of 20%), while the stock trades at P/E of only 8 times. The ADR, at $5.36, is down from $6.80 in early October. It last traded at these levels towards the end of last year. In neither Mexico nor Brazil would I venture that we have seen the bottom, nor should one be too aggressive. In both markets, I would be “bottom up” in investing approach. Note that we are not adding either of these stocks to our “official” portfolio, so I do not guarantee to continue to follow regularly.

Massive New Gold Discoveries: Are They Real?

Q. I read that both Uganda and China recently discovered huge gold deposits. Are these discoveries large enough to affect the gold price and if so how long might that process take? – J.M., Calif.

A. Re. Uganda, you are probably referring to the story from a couple of years ago. For some reason, the story has just re-appeared on Yahoo! Finance. It is total nonsense. The president and mining minister of the country, in announcing the “discovery,” displayed utter ignorance of mining, while the media just reported it without thought. The announced “discovery” would have doubled all known global gold reserves. The timing of the announcement, immediately following a new mining law and a pitch to foreign investors, was, shall we say, coincidental. If true, it would have affected the price of gold most definitely. I’ll note that we have not heard anything about this “discovery” since.

The apparent discovery in Hunan would make it the largest gold mine ever in the history of the world, larger than the current largest (South Deeps in South Africa) by about 10%. Not impossible, but I am skeptical until we learn more from reputable sources. I am not holding my breath. If it were to be true, it would take several years before it would hit the market.

New Views on Vista?

Q. I noticed that another analyst had assigned a takeover value on Vista of $2.75. This looks pretty optimistic, no? I’d be willing to take a deal that would give me $1.50 just to be able to move on! Really hate to think about Vista joining with a partner to do the mining. Should VGZ not at least be getting ‘too low’ offers? – D.G., Conn.

A. If the analyst to whom you refer is the individual I think it may be, then this person has consistently been overly optimistic about the stock (as he is about others). This analyst’s firm was the lead brokerage for the company’s last financing (no doubt coincidentally).

In recommending selling Vista, I commented that the market focus was on a transaction and not additional drilling. I understand that there have been indicative offers to buy the whole project, which were rejected because they were considered too low. A joint venture, such as the company would like, would not be the optimum outcome for shareholders, in my view. I should add that once I have sold a position I may no longer follow the company as closely as I did before.

I’ll note that the stock has declined from our last sell. While it is possible that eventually a transaction of some kind will occur that will see the stock price higher, in the meantime there are better places for your money.

ACTIONS HAVE CONSEQUENCES Just a year after Panama ordered the Cobre Panama mine shut, both Moody’s and S&P have lowered the country’s credit rating over concerns about the budget deficit. Fitch, the third rating large rating company, already rates Panama’s government debt as junk. Panama could do with the revenues from the Cobre Panama mine, on which our holding Franco-Nevada Corp. (FNV:TSX; FNV:NYSE) holds a stream.

IF (RECENT) HISTORY IS A GUIDE The table below (thanks to L.B. from Haywood Securities) shows the performance of the GDX gold-stock index on a monthly basis for the last decade. It has risen in every December over this time. So, will the pattern repeat?

Such patterns often change over time as more investors use them in timing buys and sells until they become self-fulfilling and then self-defeating. When I wrote my book Investing Resources in 2010, gold stocks, on average, had fallen in December for the past decade. September was by far the strongest month for gold stocks, four times as strong as the second strongest, May. Now both May and September are negative months, with September the weakest, twice as bad as the second-weakest month. The two strongest months over the past decade — January and April — both had negative returns over the decade before I wrote my book. All such patterns are backward-looking and can change.

EXPENSIVE ADVICE? Not really. We bought Agnico Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) three years ago at $53.60, giving us a total return of almost 70% (so far). If you had bought just 50 shares when it was first recommended, that one stock would have generated gains sufficient to pay for your subscription with money to spare.

We first bought Nestlé in 2008 at Sfr 41.21, for a current total return of almost 200%. If you owned just 130 shares of Nestlé when first recommended, your dividend on this stock alone would now be paying for your subscription. Just saying!

UPCOMING EVENTS The in-person Vancouver Resource Investment Conference, will be on January 19th and 20th. Confirmed speakers include Ross Beaty, David Rosenberg, and Brent Johnson (plus many more). You can find more information and obtain your tickets, here.

And the next On the Move virtual webinar with ASI will be January 23rd evening, with special guest Brett Eversole, a lead analyst at Stansberry Research. We shall review the year past and look ahead in what promises to be a most informative discussion.

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Important Disclosures:

1. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Barrick Gold Corp., Lara Exploration Ltd., Franco-Nevada Corp., Agnico Eagle Mines Ltd., Metalla Royalty & Streaming Ltd., and Fox River Resources Corp.
2. Adrian Day: I, or members of my immediate household or family, own securities of: All. My company has a financial relationship with: All. I determined which companies would be included in this article based on my research and understanding of the sector.
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Adrian Day Disclosures

Adrian Day’s Global Analyst is distributed for $990 per year by Investment Consultants International, Ltd., P.O. Box 6644, Annapolis, MD 21401. (410) 224-8885. www.AdrianDayGlobalAnalyst.com. Publisher: Adrian Day. Owner: Investment Consultants International, Ltd. Staff may have positions in securities discussed herein. Adrian Day is also President of Global Strategic Management (GSM), a registered investment advisor, and a separate company from this service. In his capacity as GSM president, Adrian Day may be buying or selling for clients securities recommended herein concurrently, before or after recommendations herein, and may be acting for clients in a manner contrary to recommendations herein. This is not a solicitation for GSM. Views herein are the editor’s opinion and not fact. All information is believed to be correct, but its accuracy cannot be guaranteed. The owner and editor are not responsible for errors and omissions. © 2023. Adrian Day’s Global Analyst. Information and advice herein are intended purely for the subscriber’s own account. Under no circumstances may any part of a Global Analyst e-mail be copied or distributed without prior written permission of the editor. Given the nature of this service, we will pursue any violations aggressively.

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