Gold Stock Bull

With this latest correction, plenty of pundits are coming out of the woodwork to claim the bull market in metals is over. These outrageous claims pop up every time there is a healthy correction in the gold bull market and frankly are laughable. I don’t know if these writers truly belive it or are just begging for attention, but the last time we heard this chatter was in April of 2005, just prior to the HUI going on a run that saw the index double in about a year. Richard Russell from the Dow Theory Letters put it best with his rodeo bull analogy:

When you are in a long-term bull market it will do everything in its power to throw you off and make you leave prematurely. The safest, easiest way to accumulate real wealth in these conditions is to hang on until the ride is over.

We could go on in detail about how the fundamental reasons for investing in gold are still in tact, but let’s take a look at the long-term chart to see what it tell us.

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We hate to agree with the uber-annoying Jim Cramer, but he has picked this one right. Cramer says that Yamana is the cheapest and best gold stock and prefers Yamana over more obvious picks such as Newmont or Goldcorp.

We have long been a fan of Yamana Gold and recently announced that we picked up Jan $12.50 call options on Yamana. Why? Let’s take a deeper dive into Yamana Gold.

Yamana Gold Profile

Yamana is a Canadian gold producer with significant gold production from four operating mines in Brazil, as well as gold and copper-gold development stage properties, exploration properties, and land positions in all three major mineral areas in Brazil. Brazil enjoys political stability, has the largest economy of South America (ranked #10 in the world) and offer a large industrial base. The country’s geological potential is abundant and relatively under-explored. Additionally, the government permitting process is efficient and expedient since mining is culturally embedded in Brazil. Yamana has also been benefiting from a weak Real in Brazil, although it has been strengthening with the impressive growth of the Brazilian economy.

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Ouch. Since the HUI broke resistance and gave us a buy signal, it has since dropped 14% in a matter of days, crashing through both its 50-day and 200-day moving averages. Gold’s spot price also dropped, shedding $45 to rest around its 200-day moving average at $590. This is the first time we have seen sub-$600 gold in over two months. Sentiment towards precious metals has turned negative in a hurry.

A stronger dollar, weaker oil prices and relative stability in the Middle East are the likely drivers of this sell-off. While Iranian and European officials are making some headway, we don’t see Iran backing down from their stance of having the right to produce nuclear energy. Likewise, we don’t see the Bush administration settling for anything less than a complete shutdown of Iran’s nuclear plants. And it is common knowledge that many inside the Bush administration are agitating for war with Iran. UN Secretary General Kofi Annan recently expressed his fears that the standoff could lead to war.

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