Buy this Miner for a Potential +37.7% Profit
After surging to a new all-time high of $1,258.58 an ounce on Friday, the yellow metal certainly could come under pressure from profit-taking or some other yet unknown exogenous event. However, for lots and lots of reasons, I like gold in this market.
- To begin with, my time-cycle forecasts for gold show a potentially very positive trend higher for the next 90 days (and possibly beyond). In the chart below, you see a small, reddish colored “wedge.” This is what I refer to as a “time-cycle inversion incidence wedge.” This indicates there is likely to be some downward pressure on gold for the next few days, as reflected in SPDR Gold Shares (NYSE: GLD), an exchange-traded fund (ETF) that replicates the performance of the price of gold bullion.
- Unlike other basic material commodities, it appears that gold is now being driven higher as a hedge against the risk of falling currencies (particularly the euro in the near-term and the U.S. dollar in the longer-term).
- I believe the risk of a double-dip recession in the United States is growing stronger. Many investors turn to gold in times of economic uncertainty, which could put upward pressure on prices.
- Likewise, gold could be the beneficiary of ongoing (and possibly growing) fears about the shaky financial situation in Europe.
Note: A time-cycle inversion occurs when the time-cycle forecast is predicting that the market will move one direction when the market actually moves in the opposite direction. The vast majority of the time, inversions are very short lived, lasting from a few days to a few weeks. There are two types of inversions: bull-bias and bear-bias.
Bear-bias inversion: Just the opposite of a bull-bias inversion, this is a situation where the market wants to move lower, but due to some artificial stimulus, the market moves in the opposite direction. In bear-bias inversions, the time-cycle analysis is telling us that the market “wants” to move lower and follow the bottom edge of the red shaded area, but is acting in a contrarian way by moving higher and following the upper edge of the red shaded area.
#-ad_banner-#Bear-bias inversions are often good times to play the role of a contrarian, where you would sell into rallies and consider taking short positions if the bottom edge of the shaded area is trending lower for an extended period of time.
If there are no shaded areas on the chart, it means the market is behaving exactly as the time-cycle analysis has forecast that it would behave. If there is a shaded area, it means that the market is behaving exactly the opposite of the forecast of the time-cycle analysis; this puts more risk in assuming that the market is going to continue to move in a direction that is opposite to the forecast based on the historical time-cycle analysis (hence the “Warning” message at the bottom of the charts).
My pick this week is, as you might imagine, is a gold-related stock: Yamana Gold, Inc. (NYSE: AUY), a Toronto, Canada-based gold miner with a market capitalization of nearly $8.2 billion.
The fundamentals for Yamana are fair, but I suspect earnings for the three months ending June 30 will come in strong when the quarterly report is released next month. The key factors include the following:
- The growth rate for total sales for the most recent quarter versus the same quarter a year earlier comes in at +62.1%. This compares to its industry growth rate of +17.3%. The S&P 500 average growth rate for the same period was +13.5%.
- The growth rate for total sales for the trailing twelve months versus the trailing twelve months of a year earlier was +63.1%, compared with the industry average growth rate of +60.2% and the S&P 500 average growth rate of +6.9%.
My technical assessment of AUY includes the following:
- AUY trades in the top of Zone 2 (see grey area in the above chart) and as long as the broader market does not trend appreciably lower, AUY could be buoyed by the rising price of gold.
- Average daily volume has been increasing in recent weeks on increasing share price. This could be a sign that momentum is building in this stock.
- Institutional ownership is at 48% — an indication that the larger institutions have a positive outlook on the stock.
Action to Take –> Based on the analysis above, I believe AUY is a good trade to put on now with the following trading parameters:
- Buy shares of AUY under $10.89
- Set an initial stop loss at $10.01
- Target price = $15.00
Potential Profit = +37.7%
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