Futures Now

Why a mega-miner merger could make gold shine

Sterne Agee's Dudas on miners and gold

Investors recently learned that Barrick Gold and Newmont Mining, two of the world's largest gold miners, discussed a merger before talks broke down. But some experts say that a deal could still be imminent. And what is noteworthy is that if Barrick and Newmont do combine to become the world's biggest gold company, that could lend a positive bias to gold prices.

"I certainly do think it's possible this time," said Sterne Agee precious metals and mining analyst Michael Dudas on Tuesday's episode of "Futures Now." "It's interesting—I've found over the years following this industry that mergers of this size happen at the peaks of markets and at the troughs of markets. And given where gold prices are, and where cash costs are, I think it's closer to a trough to the marketplace."

Gold mining stocks have gotten crushed recently, as gold prices have fallen even as production costs have surged. But Dudas says a merger could smother expensive gold projects. This would lead to a slower expansion of supply, which would help gold prices.

"Any capital discipline, I think, is going to be positive for these companies in combination, and for the gold market in general," Dudas said.

Interestingly, there have already been $102.8 billion worth of announced mergers in the materials sector year to date, according to S&P Capital IQ. That's a 210 percent increase over 2013 up to April 22—the biggest jump of any sector.

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A mine worker displays a large ingot of gold during the refining process at the Loulo-Gounkoto gold mine complex operated by Randgold Resources Ltd. in Loulo, Mali, Nov. 1, 2013.
Simon Dawson | Bloomberg | Getty Images

George Gero, precious metals strategist at RBC Capital Markets, agrees that a merger between Barrick and Newmont would be good for gold. But he says that's a function of Barrick's and Newmont's different hedging strategies.

Gero points out that Barrick hedges its gold through fixed income sales contracts, while Newmont does not. But instead of hedging fully, some miners use options to partially hedge gold exposure, and all of this bearish options action (selling calls and buying puts) hurts gold prices, he said. So if the combined Barrick and Newmont fully hedge by using fix-price sales contracts to hedge instead, some of the downside pressure on gold would be removed.

"I think it would bring back hedging, and maybe help gold prices longer term," Gero wrote to CNBC.com.

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So how high could gold go?

Dudas notes that gold seems to be having technical trouble at the $1,290 and $1,300 levels, slightly above where its trading now. But he says that at some point in 2014, "we'll see $1,400 into the $1,420-$1,440 range."

—By CNBC's Alex Rosenberg.

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