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(NIR ELIAS/NIR ELIAS/REUTERS)
(NIR ELIAS/NIR ELIAS/REUTERS)

Schizas' Mailbag

New Gold needs bullion to move higher before it's a buy Add to ...

Lou,

Where is New Gold Inc. going in the near term? It has been beaten down over the last few months.

Is it a good time to buy?

Thanking you in advance,

Walter

Hey Walter,

Thanks for the assignment. New Gold Inc is a gold producer with a tiger by the tail at the El Morro deposit in Chile. The company expects to produce between 405,000 and 445,000 ounces of gold in 2012 and owns a 30 per cent stake in El Morro which is expected to produce 210,000 ounces a year of gold and 200 million pounds of copper over the projected 17 year life of the proposed mine.

That’s the rub. El Morro is a stunning deposit which is facing some issues. One is the legal tangle between Goldcorp and Barrick Gold Corp over ownership of the 70 per cent majority interest in the project. The other is the recent decision by a Chilean court to suspend approval of the environmental permit for the project.

The estimated cost to bring the El Morro deposit into production is $3.9-billion but with delays in the courts I would expect that the cost will move higher. Time is money after all. A review of the charts will help to answer your questions.



The three-year chart for gold is the best place to begin the analysis. It is evident that the price of the metal peaked in September of 2011 and, as goes gold so goes NGD.

The three-year chart for NGD is almost an exact duplicate of the gold chart. One of the lessons we can glean from this is that if you are investing in commodity stocks please make it a habit to track the price of the underlying resource.

What we can also observe from this picture is that there is support at $9.00 that goes back to late 2010 and that since March of 2012 there has been resistance at $10.00. Neither the MACD nor the RSI are indicating that momentum is about to shift towards a buying.

The six-month chart depicts the double top that surfaced in February when the shares were trading above $12.00. The retreat to $9.00 has been a very sobering reality check for investors.

At this point there is no reason to jump in until we see some buying come into the stock (and the commodity) to reverse the selling that has dominated the agenda for the last seven months.

Make it a profitable day and happy capitalism!



Have your own question for Lou? Send it in to lschizas@globeandmail.com.

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