Are there any other particular stocks that you watch that fit the maximum pessimism trade?

David Skarica:

I think that what has happened in Newmont Mining Corp. (NEM:NYSE) and Barrick Gold Corp. (ABX:TSX; ABX:NYSE) is interesting.

It's similar to what happened in Agnico-Eagle Mines Ltd. (AEM:TSX; AEM:NYSE) in late 2011 when it essentially threw the baby out with the bath water.

Agnico had bad earnings; it downgraded the resource on one of its mines and wrote off a bunch of assets. It downgraded future production, future profits, etc. Agnico has performed well since then. It bottomed at roughly $30/share and rallied to the mid- to high $50s, and it's about $50/share right now. If you look at Barrick and Newmont's Q4/12 earnings, they did the same thing—wrote off assets, wrote off resources, wrote off future profits. Both of those companies had minor warnings last year, but what they decided to do is throw everything out.

Now the expectations are very low. Both Newmont and Barrick trade at ridiculously low valuations. Barrick has a forward price/earnings ratio of 6 or 7, which for the whole mining sector is unheard of. Newmont has a dividend linked to the price of gold. There are many reasons to like each of these companies. Now that expectations are so artificially low, which the companies themselves created, there is a solid base for stock performance in the future.

Another producer I like is Eldorado Gold Corp. (ELD:TSX; EGO:NYSE). Eldorado is in a similar position to where Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE) was a few years ago when Yamana was expanding rapidly and issued stock to fund that expansion and mine building.

Eventually, the production and profit show up in the bottom line. As a result of that well-timed expansion, Yamana has held up much better than the rest of the mining sector. That is where Eldorado is right now. From a valuation perspective, those are my three top picks of the senior gold producers.

TGR: In The Gold Report interview in February 2011, when gold was at $1,355/ounce (oz), you said, "I think that after the next rally we're going to see a significant pullback in gold probably in the 2012–2013 period, but that will just be a buying opportunity." So two years ago, it looks as if you pretty much nailed it. Do you have an update to that forecast or the next forecast to layer on top of that?

DS: From a technical perspective, in mid-2011, we had a big spike in gold prices over $1,900/oz. We are now in the second longest consolidation of the gold bull market. The only one that was longer was the 2004–2005 consolidation, and that was longer by only a couple of months.

Technically, a spike high followed by a sideways trading range that builds the base between $1,530/oz and $1,650/oz is a positive development. As the saying goes, "The longer the base, the more the space." It could also be called a "coiled spring." The longer we trade sideways, the bigger the break out should be. I don't anticipate new lows. It appears that we are nearing the end of the base and, though I don't want to sound like an out and out goldbug, I believe the breakout will be huge when it happens.

One driver of the breakout, which no one is really talking about, is what's going on in Japan. Japan has now decided to devalue and print for the first time in 20 years. It is going to print more money than the U.S. and Europe combined, even though it is a much smaller economy.

That third nation of money printing—counting the Eurozone and the European Central Bank as one nation—is going to be phenomenal for the price of gold.

Now you just have to be patient. I don't know if this breakout is going to start in March, June, September or December, but I really think that 2013 will be the year that we will break out. If you're looking at a price target, I'll just use the easy price target of $2,000/oz by the end of the year.

TGR: Fair enough. I hope your forecast for the next year works out. We look forward to checking in with you again.

In 1998, David Skarica started Addicted to Profits, a newsletter focused on technical analysis and the psychology of markets. From 2001 to 2003, Stockfocus.com ranked Addicted to Profits third out of over 300 newsletters for performance. He is also the editor of Gold Stock Adviser and The International Contrarian, which focus on gold and global investing. Skarica has also been a contributing editor to Canadian MoneySaver and Investor's Digest of Canada.