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October 5, 2014

Gold Broke Below The Critical $1,200

By Karim Rahemtulla, Chief Resource Analyst at Wall Street Daily

Gold broke below $1,200 – a level it hasn’t breached since 2010!

If gold rallies back up in the next few days, it will form a classic triple bottom. This is a bullish indicator signaling that there’s substantial support from buyers.

In my last article, I explained the best way to own bullion in an easily tradable manner. Now, if gold rallies, you should be looking for much higher returns.

And there’s one company in particular that holds all the cards should gold blast higher. (Hint: It’s not what you expect.)

Playing a Royal Flush

The chart below shows how gold has hit bottom twice already – and is poised to drop to $1,200 once more…
Gold Hits a Triple Bottom: Gold Prices from 2009 to 2014
It’s possible that gold could blow through $1,200 and reach $1,150. That’s not such a bad thing, if the price immediately bounces back above $1,200.

In either case, a “stand” at $1,200 or a rally is your signal to start accumulating gold and gold stocks.
Once the price movements play out, you should be taking aim at a gold royalty company that’s fared much better than any type of mining company.

Franco Nevada (FNV) will rally in a much stronger fashion than any senior miner when gold prices start to rise again.

The reason isn’t complicated.

Franco Nevada makes money from collecting royalties on every ounce of gold that’s mined for the company under a contract.

It doesn’t do the mining, and it doesn’t have the expenses associated with a mining operation or with starting one up. Instead, it lends mining companies cash – or it invests in them for a stream of royalties on each ounce produced according to its agreement.

Most importantly, Franco Nevada has zero debt. This means it can survive without resorting to diluting its shares to raise capital just for operations.

Over the past 12 months, Franco Nevada’s shares have been performing better than any senior mining company, despite falling revenue. That might seem odd. But it’s not if you look at things on a relative basis, not an absolute basis.

Franco Nevada’s revenue growth has been minus 2.6% over the last year. If you compare it to a major miner like Barrick Corp. (ABX), which has seen its shares fall by almost 40% (versus around 18% for Franco Nevada), the reasoning becomes clearer.

Barrick is experiencing negative revenue growth to the tune of 22%, while its debt-to-equity ratio is over 80%. Barrick set a 52-week high in February; Franco Nevada hit its high in August.

So even when gold prices were rallying, Barrick was unable to make a new high. That’s a very important “tell.”

Winning the Game vs. the Hand

Gold mining is a very capital-intensive business, and it can take years to develop a mine and bring the metal to market.

Companies with strong balance sheets can weather the downturns. But companies with no debt can do even better.

Though gold is weak right now, it’s not a permanent condition.

With that said, short-term factors like seasonal demand for the Indian wedding season or a correction in the stock market aren’t reasons to buy.

The reason to buy is for the longer-term supply-and-demand picture.

Demand is not abating, and supplies aren’t growing as quickly. Heck, they may even shrink as the cost of developing and operating mines go even higher.

If gold does break down, you’ll want to take the opportunity to invest in a play that won’t just outperform during a recovery, but will also be cushioned during a time of underperformance.

Franco Nevada fits the bill. If gold’s technical picture plays out like I described above, it’s definitely the company to buy during a rebound in gold prices.

And “the chase” continues,

Karim Rahemtulla

Courtesy Wall Street Daily (EconMatters article archive Here)  

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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Item Reviewed: Gold Broke Below The Critical $1,200 Rating: 5 Reviewed By: Econ Matters