Promising gold stock: DROOY

This is even more significant if we consider that the USD has been rising against major currencies over the last 6 months or so:

I say this because gold was being used as an hedge to a falling US dollar. That was one of the principal causes for the rise in gold, analysts said. Well, not anymore. Now gold and the dollar are rising in tandem, and that means gold is rising on its own fundamentals, not because of currency arbitrage. This is signaling inflation on the horizon too.

I wrote about this macro change on GG's thread (my dear GG, why did I sold you? ): the fact that gold is rising without the help of a falling US Dollar is a meaningful fundamental shift and it means gold will move a lot higher from current levels.

So, if gold is rising and that trend will probably continue, we want to look for gold related stocks. There are a number of them that look attractive (GG is the best long term holding if you ask me), but on a shorter term view I find the South African gold companies the most promising.

There was a problem with these stocks, you see, gold is traded in USD, so these companies sell gold for USD. But, their operations are primarily in South Africa, so their costs are in RAND. The South African Rand rose from $14 in 2002 to less than $6 in early 2005 as you can see on the long term chart below:

The gold price long term rise wasn't enough to compensate for a falling USD. Gold production and sales were up, but revenues weren't, because of this currency issue. In the meantime costs rose, so profits declined and so did the share prices, of course.

But now we have some profound changes in the fundamental picture of these currencies relationships:

1) First of all, gold now is rising in the face of a strengthening dollar. No more currency arbitrage, gold is bullish because of its intrinsic fundamentals.
2) The dollar isn't on a free fall anymore against major currencies of the world, in fact, the USD Index is up in 2005.
3) The Rand is no longer getting stronger and stronger against the dollar and probably the trend has been reversed in 2005 in favor of the dollar.

This means the following for south african gold companies:

1) With gold price up, their proceeds from gold sales will naturally rise.
2) Revenues will rise even more, because they are no longer being eroded by a free falling USD.

So, it is clear we want to buy some South African gold company's shares. I've been looking and the one that suffered the most from this dollar/rand relationship is DROOY. The stock went down from a high of $5.80 in April 2002 to a low of $0.30 in April 2005. Now the long term trend has reversed and yesterday the stock rose 10% on volume above average.

Check the long term chart:

And the short term chart:

I'm buying DROOY for the 3 Stocks on Fire Portfolio at today's open.

(This recommendation was made by David Randolph from 3 Stocks on Fire, and he will update this analysis everyday after the close until he sells the stock. The 3 Stocks on Fire Portfolio is up 159% since inception on 28th of April 2005. 3 Stocks on Fire is a Community of stock traders and investors. Our 3545 members exchange trading ideas and strategies on our message boards everyday. We welcome you as a new member of the 3 Stocks on Fire Community, please take 10 seconds to register and receive our free newsletter)