I am pretty convinced that all of this QE is going to eventually lead to inflation (although at the moment, there is no evidence of this). To make good money in the markets you have to think things through and preferably come up with a contrarian strategy. I am not really a momentum investor, which means following the herd to a large extent. The real key to making money is to analyse everything within a scenario and take your pick of the best of breed. So, I think that the price of gold is going to rebound when QE generated inflation eventually kicks in.
The markets are seriously disjointed right now. I know a lot of people who have worked in the markets for a long time and none of them seem to understand what is going on, which means that you have to be very very careful. There is little doubt in my mind that the price of commodities (including gold) rose on the back of enormous speculation by hedge funds, other institutions and high net worth individuals. What we have been seeing over the past 12-18 months is a gradual unwind of this overall position.
As the price of gold has fallen, investors in gold stocks have been very seriously burned. Smaller gold stocks have been going to the wall and the larger stocks have seen their share prices plummet.
One such stock is African Barrick Gold. It has been taking steps to adjust to the lower price of gold and is still expected to pay a dividend of around 5-6p this year. Dividend cover is somewhere between 2 and 3 times, depending on what forecasts you believe. They are in the process of closing down their most expensive mine (Tulawaka) and they have conducted an operational review which will result in robust cash flows. They have plenty of cash in the bank and generated strong cash flow in the first Quarter.
The share price has fallen from a high of over £6.50 and currently sits at a lowly £1.32. The average analysts forecasts look excessively pessimistic to me coming in with fully year EPS at 12.1p. The 1st quarter EPS was just shy of 3.3p and I can see this improving throughout the year. In any event, once Tulawaka is completely closed, this will have a dramatic effect upon earnings. In the first quarter results, they restated earnings excluding Tulawaka to give investors sight of how earnings will be affected once it is closed. The closure is expected by mid-2013 so expect an announcement relating to that in the coming month or two.
For the rise in the gold price that I expect and my belief that all is not as rosy in the garden generally as the financial markets are currently depicting; the elimination of the loss making Tulawaka mine; the strong cash position and cash generative nature of the business, the dividend of the week is African Barrick Gold.
