Gold has exploded higher during the past several years. The bullishness has been ignited by massive global fiscal stimulus programs, slowing production growth and aggressive purchasing of the yellow metal by several central banks. It's no wonder gold prices are up nearly 100% during the past five years.
Take a look at the weekly chart…
Although the yellow metal is off its all-time 2011 highs of more than $1,900 per ounce, there is solid technical support in the $1,550 area, as you can see in the chart below. Gold has since bounced from this support, hitting $1,800 per ounce in October prior to falling back and finding support at the 50-week simple moving average at $1,665.
Despite gold's solid performance over the years, gold-mining stocks have lagged. This is unusual since gold-mining companies make their profit on the spread between what it costs to extract gold and the price of the commodity. Historically, there is a positive correlation between the price of gold and the performance of gold-mining stocks.
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But starting in 2008, there has been a disconnect. Rising production costs, political risks in some of the regions miners operate and simple economic worries have superseded the common-sense correlation. This has resulted in gold-mining stocks underperforming the commodity itself, which in turn has resulted in much of the negative investor sentiment around gold-mining stocks.
And it is within this negativity that I see a great profit opportunity. The key strategy is simple: Buy undervalued gold-mining stocks poised for a reversal of fortune.
In this case, I think one particular gold miner is a diamond in the rough.
Barrick Gold Corp. (NYSE: ABX) is one of the world's largest gold miners, with 27 operating mines in North America, South America, Australia and Africa. The stock has been smacked down from its recent high of $43 a share in mid-September to $34 in November, which is just above its 52-week low. Barrick Gold boasts the lowest price-to-earnings (P/E) ratio of its peers at 10.2 and its 29% earnings growth rate is the highest among the competition.
Hedge-fund ownership
The fact that hedge fund wizard David Einhorn doubled his position in the stock during the third quarter and held it steadily this quarter, despite the price drop, gives me even more confidence in Barrick Gold. The gold miner makes up about 1.3% of his U.S. long portfolio (1.9 million shares), indicating a strong bullish bias for the company.
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The future
The company has ambitious plans to reduce costs while ramping up copper production in the coming years.