As anxiety over U.S. economic performance increases, so too does the price of gold.
Surging to more than $1300 per ounce, the precious metal hit a new record the September 20th trading week, following news that the Federal Reserve may undertake quantitative easing to combat the threat of deflation.
With all-time high bullion prices, many gold mining stocks are getting a boost.
The miner is attractive because its major properties are located in politically stable countries where taxes are low and infrastructure is solid. As a result, its mining developments are likely to continue without political disruption or turmoil. Newmont is also the most cost efficient miner of its peers, meaning that for every ounce of gold extracted, the company pockets that much more profit. These profits are helping drive up the share price.
With shares hitting a 20-year high this week, NEM still appears to have plenty of room to run.
Between January 2008 and May 2010, the stock formed an inverted head and shoulders pattern.
The left shoulder (labelled “LS” on the chart) formed between January and August 2008 as the stock bounced between $56 resistance and $41 support.
After falling through $41 support on three separate occasions between October and November 2008, NEM touched a low near $20.79. This triple bottom became the head (labelled “head”).
Surging off this low, NEM began a major uptrend. The right shoulder (labelled “RS”) formed between June 2009 and May 2010 as NEM moved to a high near $56, fell to support near $42, then once again tested key resistance near $56.
In June 2010, NEM bullishly broke resistance — and the inverted head and shoulders pattern. At this time, the stock briefly tested a small shelf of resistance near $62.50 before pulling back near $56.
However, during the summer months, NEM once again began trending higher. During the September 20th trading week, NEM successfully tested and broke resistance near $62.50. In doing so, the stock completed a long-term ascending triangle pattern.
Now testing the upper Bollinger band, which intersects at $64.64, NEM is currently above the rising 10- and 30-week moving averages.
With no recent overhead resistance in sight, NEM could test its all-time high near $76. The measuring principle — which is calculated by adding the height of the inverted head and shoulders to breakout level — projects a somewhat higher price target of roughly $84 ($52-$20 =$32; $52 +$32=$84). [Read more in detail: Principles of Technical Analysis: The Complex Head and Shoulders Pattern]
The indicators are bullish. MACD has just given a buy signal. The MACD histogram is beginning to expand in positive territory.
Relative strength index (RSI), which has been on a major uptrend since becoming deeply oversold in October 2009, is still rising. At 64.1, it is approaching deeply overbought levels, but is not yet there.
Stochastics is still on a buy signal and is approaching, but has not yet become highly overbought. However strong stocks can become and stay overbought for long periods of time.
Fundamentally, NEM appears to have strong growth potential.
In late July, Newmont reported strong second-quarter results, although, admittedly, they were below analysts' expectations. With record gold prices and higher production rates, revenue increased +37.5% to $2.2 billion, compared to $1.6 billion in the year-ago quarter.
For the full 2010 year, analysts project revenue will increase +22.1% to $9.4 billion, compared to $7.7 billion in 2009. With continued strength in gold, by 2011, analysts project revenue will increase another +3.2% to $9.7 billion.
The earnings outlook is equally upbeat.
With strong demand for gold, second-quarter earnings more than doubled to $0.77, compared to $0.35 in the year-ago quarter.
For the full 2010 year, analysts expect earnings to increase +28.7% to $3.59, compared to $2.79 in 2009. By 2011, earnings should increase an additional +11% to $3.99.
With a strong growth outlook, Newmont recently declared a +50% quarterly dividend increase. The company will now pay a quarterly dividend of $0.15 per share, for a yield of just under 1% ($0.60/$63.40).
In addition to strong growth potential, Newmont is attractively valued in comparison to its peers.
Newmont is also cash rich, with $3.7 billion in cash and equivalents. This liquidity should give Newmont the financial freedom to continue exploring new mining operations.
Action to Take–> Given NEM's attractive valuation, solid growth potential and strong technicals, I recommend