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Cyprus Crisis Meets Capitulation in Gold Stocks: A Perfect Storm?


If the banking crisis in Cyprus is more than a hiccup and capitulation in gold stocks is near, compelling buying opportunities could be at hand.

The bearish sentiment on gold stocks was nearing a climax just as the Cyprus crisis reared its head. If a run on the bank happens and the European Central Bank (ECB) fails to provide needed liquidity, it could reignite troubles in Greece and spark fears in other Southern European countries.

It could also halt the advance of the broader domestic markets, strengthen the dollar, and support a reversal in gold's downtrend, where a bottom is forming -- that is, if you believe that gold can rise in tandem with a strengthening dollar, as some analysts predict. "You have to differentiate between low-level tensions, which impact negatively on the euro, push the dollar higher, and undermine gold prices, and a proper crisis," said Natixis analyst Nic Brown, "If you have a genuine crisis, people are searching for any safe haven they can find, and gold prices go up along with a stronger dollar."

If gold strengthens, the gold mining sector, which has been particularly shunned as the general markets have ascended, might present compelling buying opportunities. While the Dow (INDEXDJX:.DJI) floated into what some pundits call "bubble territory," the Gold Bugs Index (INDEXNYSEGIS:HUI), lost more than 40% over the past 18 months. And the Market Vectors Gold Miners ETF (NYSEARCA:GDX), fell even more precipitously – 31% in the past five months, down by 18% in February alone. Amid the ferocious correction in gold mining stocks, the overwhelmingly bearish sentiment eclipsed the fact that certain miners' profits have continued to grow.

By the end of the third quarter of 2012, the disconnect in fundamental valuations showed HUI stocks boasting a dividend yield of 2.1%, nearly matching the S&P 500 (INDEXSP:.INX) dividend yield of 2.2%, and while selling at a 30% discount to the general market.

If the Cyprus crisis spreads, and investors return to gold as a safe haven, well capitalized gold mining stocks that held up during recent sell-offs should do well. Look for miners that reported profits despite strong negatives like inflated energy prices and escalating gold production costs. For example, Barrick Gold (NYSE:ABX), ranked sixteenth among the top fifty gold producers globally by the Natural Resource Holdings' Report, reported fourth quarter adjusted net earnings per share that were the second highest in the history of the company. Also, despite depressed earnings per share, a healthy dividend yield of 2.53% was reported based on its recent closing price of $31.59. Almost half of Barrick's 2013 exploration budget of $400 million to $440 million has been allocated to its productive Nevada mines.

Next to one of Barrick's most important Nevada mines is newcomer Bullfrog Gold (OTC:BFGC). With strategic land positions and a well capitalized vote of confidence -- RMB Resources provided $4.2 million in debt facility -- the junior minor is fully funded for its Newsboy project and operations for the next two years. The company recently announced that project land holdings around its Newsboy project will now total about 7,400 acres. Bullfrog's CEO Dave Beling was formerly with Allied Nevada (NYSEAMEX:ANV) during its development of the High Croft mine, which is now expanding in a major way.

Whether or not worries over the Cyprus situation erupt into a full-fledged crisis, there's a case for buying gold mining stocks, which look cheaper than they've been for years; many have healthy dividend yields and possibly great upside potential. Should a currency crisis spread, it won't be the first time that gold is looked to as a safe haven alongside a strengthening dollar.
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