The 2013 was certainly not the year that gold bulls had hoped for as gold prices declined 27 percent to post the first annual decline for the yellow metal in over a decade.
Gold prices have tended to take their cue from different drivers at different times but, since 2011, gold prices have traded according to movements in U.S. real interest rates as well as ETF gold holdings.
The onset of the Fed taper discussion proved to be the nail in the coffin for gold in 2013, as expectations for rising rates began to be priced in, and profits were quickly taken in ETFs. Currently, gold is down 0.80 percent and trading at 1,235.40.
CIBC analyst Alec Kodatsky doesn't believe this is the "end of the road" for either gold or gold equities and believes, at present, sentiment has overshot to the downside, creating the potential for a 2014 recovery - although sentiment will take time to repair.
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There are some positive fundamental factors for gold that argue for higher future prices, namely the ongoing strength in physical demand, the pronounced west-to-east flow of physical gold, and the likelihood that at current gold prices mine production, as well as scrap supply, are set to decline.
Gold may have a reasonable 2014 despite the fact that low inflation and rising 10-year Treasury yields in the U.S. suggesting that market conditions are not optimal for gold prices, with the front end of the year likely seeing the biggest headwinds.
However, Kodatsky believes that consensus expectations for inflation to remain benign at 1 percent, and 10-year yield to trend up to 3.5 percent actually suggest an environment in which gold has historically been able to post modest, but consistent price gains.
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Historically, in a real rate environment of 1-2.5 percent, gold has on average posted an increase of approximately 2 percent per quarter, which is consistent with upward trending price forecast for 2014.
The market appears to have priced in significant downside to the gold sector, ignoring potential positives, such as strong physical demand (consumer and central bank buying), continued stabilization in gold ETF demand, and tighter supply.
Even in today's challenging markets, Kodatsky believes the intermediate producers still represent attractive investment opportunities, offering significant leverage to gold prices and trading at a valuation discount, relative to the senior producers.
Similarly, gold equities are pricing in spot gold and offer little to no credit for growth, exploration, improved mine plans or incremental cash cost. Investors should favor companies with a combination of quality, low-cost operations, a strong balance sheet, and a management team with a proven track record for success.
Following are a few stocks that investors may consider:
Goldcorp Inc. (NYSE:GG) (TSE:G) - Goldcorp is one of the fastest-growing, lowest-cost senior gold producers. It had gold production of 767,700 ounces in the fourth quarter, resulting in 2013 gold production of 2.67 million ounces, an increase of 11 percent over 2012.
The company had approximately $620 million in cash at year-end, an undrawn $2 billion credit facility. It expects 2014 gold production to grow approximately 13-18 percent, to between 3.0 and 3.15 million ounces. The all-in sustaining costs for 2014 expected to decrease to between $950 and $1,000 per ounce and are estimated to come down by 15-20 percent over the next two years.
Top 10 Undervalued Companies To Watch For 2014
Yamana Gold, Inc. (NYSE:AUY) (TSE:YRI): Yamana is a Canadian-based gold producer with significant gold production, gold development stage properties, exploration properties, and land positions throughout the Americas including Brazil, Argentina, Chile and Mexico.
For the third quarter, gold production came in at 263,830 ounces. All-in sustaining costs were $730 per gold equivalent ounces (GEO) on a by-product basis. The cost is 20 percent lower than the second quarter 2013. Cash and cash equivalents as at Sept. 30, 2013 were $232.1 million and had approximately $1.0 billion of available cash and undrawn credit. All-in sustaining cash costs on a by-product basis for 2014 is expected at $850.
Agnico Eagle Mines Limited (NYSE:AEM) (TSE:AEM): Agnico Eagle is a gold producer with operations located in Canada, Finland and Mexico. The company has full exposure to higher gold prices consistent with its policy of no forward gold sales. For the third quarter, it recorded payable production of 315,828 ounces at total cash costs per ounce of $591. Cash and cash equivalents totaled $141.7 million at Sept. 30, 2013. The company has available bank lines of approximately $1.05 billion.
Eldorado Gold Corp. (NYSE:EGO) (TSE:ELD): Eldorado Gold is a Canadian-based, low-cost gold producer with operations in Asia, Europe and South America. The company had gold production of 204,620 ounces at an average cash operating cost of $472 per ounce for the third quarter, compared to gold production of 169,565 ounces at $493 per ounce. It had cash and cash equivalents of $665.84 million as of Sept.30, 2013.
Silver Wheaton Corp. (NYSE:SLW) (TSE:SLW): Silver Wheaton has quickly positioned itself as one of the largest precious metal streaming company in the world. Based upon its current agreements, forecast 2013 attributable production is approximately 33.5 million silver equivalent ounces, including 145,000 ounces of gold. By 2017, annual attributable production is anticipated to increase significantly to approximately 42.5 million silver equivalent ounces, including 210,000 thousand ounces of gold. At Sept. 30, 2013, the company had approximately $62.0 million of cash on hand and has $1 billion available under the revolving credit facility.
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