Recently two mining giants -- Goldcorp (GG) and Barrick Gold (ABX) -- published their bullish earnings reports showing increasing margins due to a rising gold price. Here is a perfect example of a report that's trying to tell us something. The hidden message in these glowing statements is of great significance to gold traders. What is the other side of the story?

The fly in the ointment may be that the majors need new blood. They are having difficulty making progress with their next generation mines; experiencing delays and shortfalls. There is a sense of urgency in their pronouncements of increasing the capital they are going to spend on exploration and development of two key emerging assets.

Goldcorp specifically identified the El Morro Project in Chile, where it's partnered with New Gold (NGD), and which has the largest potential increase in reserves. New Gold has had a major breakout at $12 and phenomenal month of August.

Read the writing on the wall. The future of the majors lies not so much in glowing statements but in their hidden meanings. These companies, as measured by the Market Vectors Gold Miners ETF (GDX), are getting more mature and are facing diminishing reserves and a rising gold price. This may be the reason why their share prices are underperforming -- they are sitting on large cash positions and must either increase dividends or look for growth through mergers and acquisitions.

My firm's area of specialization is in researching promising explorers, as measured by the Market Vectors Junior Gold Miners ETF (GDXJ), which will grow increasingly attractive as acquisition targets for the older majors. For example, the acquisition by Newmont Mining (NEM) of Fronteer.

Also witness the recent move by Agnico Eagle Mines (AEM) in investing $70 million dollars in a young promising company Rubicon Minerals (RBY), which had recently sold off to the downside. Also look at Aurico Gold’s (AUQ) takeover of Northgate Minerals (NXG) at valuation levels not seen in more than seven years. I realize that miners have been trailing bullion for several months and am convinced that their day is yet to come. Rubicon had recently published a decrease in resources, sending shares plummeting. Agnico seized the opportunity to make a very advantageous investment. In the Summer of 2008, Agnico had taken interest in Gold Eagle Resources at bargain prices. It didn’t take long for Goldcorp to buy the entire company, giving Agnico a significant profit. This may be exactly the template that other hungry majors will be looking to emulate as they buy emerging properties at discounted prices. As the price in gold bullion advances many situations increase in value. GST is always on the hunt for assets in the earth which are the mother lodes of the eventual bullion.

When the day of the junior miners comes, the profits will far outstrip those of bullion. From a technical standpoint, often times mergers and acquisitions are not readily discernible in chart patterns. Indeed, Fronteer had quite a nasty correction before it was acquired by Newmont. Suffice it to say that momentum traders rarely benefit from mergers in the making.

I've noticed that equity prices will fall below a rising 200 day moving average only to eventually break through on the way up. Interested parties might find juniors at irresistible bargains right now in comparison to gold bullion.

Read more in depth reports from Jeb Handwerger at Gold Stock Trades.

Disclosure: Long GLD,SLV,GDXRos

By Jeb Handwerger

http://goldstocktrades.com

© 2011 Copyright Jeb Handwerger- All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

Only logged in users are allowed to post comments. Register/ Log in

The Market Oracle is a FREE Financial Markets Forecasting & Analysis web-site.
(c) 2005-2024 MarketOracle.co.uk (Market Oracle Ltd) - Market Oracle Ltd asserts copyright on all articles authored by our editorial team and all comments posted. Any and all information provided within the web-site, is for general information purposes only and Market Oracle Ltd do not warrant the accuracy, timeliness or suitability of any information provided on this site. nor is or shall be deemed to constitute, financial or any other advice or recommendation by us. and are also not meant to be investment advice or solicitation or recommendation to establish market positions. We do not give investment advice and our comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to enter into a market position either stock, option, futures contract, bonds, commodity or any other financial instrument at any time. We recommend that independent professional advice is obtained before you make any investment or trading decisions. By using this site you agree to this sites Terms of Use. From time to time we promote or endorse certain products / services that we believe are worthy of your time and attention. In return for that endorsement and only in the cases where you purchase directly though us may we be compensated by the producers of those products.