Gold and silver are often chosen as “safe havens” when equities are losing ground and earnings are on the decline. The former is considered by many to be a form of global currency while the latter tends to track its price at a fraction of the cost.
While long term trends for precious metals like Gold have been bullish, buying them at the wrong time can sometimes mean months or years of your investment being underwater until prices rebound.
Mining stocks can sometimes amplify the volatile movements of precious metals they gather from the Earth, especially when there are dramatic movements in the price of the commodity itself combined with no reduction or even increases in the costs associated with mining the commodities themselves.
This can turn a “safe haven” into a big headache…
Even though shares are only trading at 14 times forward earnings, Yamana Gold AUY may be one of the precious metal miners to avoid; at least for now.
Gold & Commodities Struggling
2013 has been the year of the quiet commodity correction with everything from corn, wheat and soybeans to silver and gold, commodities have been on the decline for many reasons. The main impetus for gold moving lower has been a normal correction in an asset that has seen tremendous appreciation sparked by a global slowdown, increased taxation of the yellow from countries like India (the world’s top consumer of gold) and other pressures.
While central banks print money in unison, we have to remember that [gold] markets have already priced much of this in and since much of that cash has not found its way into consumers’ hand directly, global inflation has been kept as bay (for now).
While I believe that the long term outlook for gold is good, I still see further deterioration in prices as economies and consumption continue to struggle. That said, if the U.S. recovers enough for the Fed to remove/reduce stimulus and begin to raise rates, the price of gold could also be negatively affected.
All of these factors may make it tough for Yamana Gold and its peers to please investors and keep their stock prices up as elevated gold prices are their key to increased margins and subsequent profits.
A good friend of mine always says “it always comes back to commodities,” but I think this is not the commodity I would be coming back to just yet, especially not with a mining stock.
Earnings Deteriorating
Yamana has been seeing more than its stock price fall over the last 6 months; earnings have also suffered and AUY has seen back to back misses in its earnings reports. Last quarter, AUY delivered a profit of just 16 cents, missing the Zacks Consensus estimate by 5 cents or almost 24%. It has missed earnings 3 of the last 4 reports and just barely met Q3 2012 estimates.
The majority of analysts have been lowering forecasts for the mining company with 2013 estimates being slashed by 34% and 2014 estimates by 25% in the last 90days alone.
One might argue that shares are down 50% from the highs in 2012 and could be a buy here. While this is true, you could be catching a falling knife if gold prices continue to falter. 2014 estimates are still 31% higher than current year estimates, which could be a hard target to hit if gold prices don’t come roaring back.
Alternatives
Instead of looking at another miner like Agnico Eagle Mines Ltd ( AEM – Analyst Report ) , who has a Zacks Rank of 3 (hold), maybe you could focus your energy (literally) on a space that has some legs under it.
Chesapeake Energy ( CHK – Analyst Report ) is a natural gas play and is investing quite a bit of time and money into natural gas delivery infrastructure here in the States. Companies like Ryder, UPS, FedEx, AT&T and others are migrating their fleets to natural gas as an alternative to high petrol prices. This should be a huge motivator for nat gas prices.
The price of natural gas has already been on the rise, but remains relatively low. You could also explore the U.S. Natural Gas Fund ( UNG – ETF report ) to invest in natural gas in the form of an ETF.
Regardless of which commodity you choose to put your money in, be sure that the macro fundamentals play into your thesis in the near term and the long term.
Jared A Levy is one of the most highly sought after traders in the world and a former member of three major stock exchanges. That is why you will frequently see him appear on Fox Business, CNBC and Bloomberg providing his timely insights to other investors. He has written and published two tomes, “Your Options Handbook” and “The Bloomberg Visual Guide to Options”. You can discover more of his insights and recommendations through his two portfolio recommendation services:
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