Your 2013 Guide to Investing in Gold

Gold bullion, gold stocks or no gold at all? I put that question to Real Asset Returns Editor Peter Krauth last week. You see, theres a lot of interest in investing in gold right now. Or perhaps I should say that theres a lot of interest in what gold might do. And you can certainly understand why. From its November 2008 market lows, the SPDR Gold Trust (NYSE: GLD) the No. 1 proxy for the yellow metal rose as much as 158%, reaching its peak in September 2011. But its down about 13% since that time (though its up 5% year to date), and a lot of folks are wondering what gold is worth, and how they should play it. Wall Street has grown more tepid on gold, with many of the investment banks ratcheting back just a bit on their target prices. But most also see prices heading up to and beyond the $2,000 level in 2013, meaning they see a potential gain of 22% or better. Peters target price is a bit more aggressive: He sees gold trading as high as $2,200 an ounce 34% above current prices in the $1,640 range. Ive worked with Peter for several years now, and admire the way he works. He based himself in resource-rich Canada in order to be closer to the many companies that he covers. And hes made a number of truly superb market calls: In September 2010, for instance, when silver was trading at $19 an ounce, Peter told investors the metal was a Buy and we then watched it soar to a high of $48 (a 153% windfall). So when I decided to bring you the latest insights on gold and some recommendations, as well I went to Peter. Obamas Secret Insights on Investing in Gold His answer: Physical bullion remains a top play; the physical metal is a vehicle for profit, and will serve as an excellent hedge against inflation and the many problems that remain in both the global and domestic U.S. economies. But gold miners are so cheap that they, too, deserve a look. Well, at least some of them do. Bill, youll see statements from some of Wall Streets big guns that gold miners are cheap right now, Peter told me during a telephone chat last week. And thats true. They are cheap on a numerical [fundamental] basis, especially compared with historical valuations. But gold miners

are cheap in another way, too a way that Wall Streets either not telling us about, or just doesnt understand. Needless to say, that last statement grabbed my attention. And I told him so. Peter laughed, and then went on with his commentary. Over the last decade or so, the best of these companies have aggressively expanded their reserves. Theyve done so organically that is, developed properties themselves. And theyve done so by purchasing small development-stage, or production-stage players, Peter said. Investors dont realize just how much it costs to add reserves especially if a company is doing so by itself. Thats particularly true today, with all the regulations and public protests boosting environmental and compliance costs. Statistics Peter provided bear this out. In 1991, there were 11 gold discoveries. Twenty years later in 2011 there were three. And companies spent $8 billion looking for new strikes that same year. So you see, Bill, that the miners that already added reserves had tremendous foresight, Peter said. Having spent a number of years just growing their reserves, all it will take to reap the payoff will be some event that kicks off a mania in gold prices. And were not talking about longshot odds for that to happen. All you need is the right set of events, either domestically or globally, to cause gold prices to rise. When that happens, gold-mining stocks will be off to the races. Gold prices have suffered of late because of a strong U.S. dollar. That surprising strength (in the face of the whole fiscal-cliff mess) stems from the fact that worries about Europe have transformed the dollar into a safe-haven investment. Gold and the dollar are negatively correlated because gold is priced in dollars, but most of the buyers arent in dollar-based economies. (Because these buyers are Swiss, Indian or Chinese, just to name a few, they look at the price of gold in Swiss francs, Indian rupees or Chinese renminbi. And if the U.S. dollar is strong, the price of gold in dollars is weak even if the native currency price remains the same.) So the rise weve seen in the dollar has been accompanied by a sell-off in gold. Investing in Gold Stocks Naturally, that sell-off in gold has affected gold stocks. Over the past three months Newmont Mining Corp. (NYSE: NEM) is down about 21% and Barrick Gold Corp. (NYSE: ABX) is down about 20%, but the SPDR Gold Shares ETF is down only about 5%. Looking ahead, the U.S. Federal Reserves plan to continue printing money (and that of the European Central Bank (ECB), or the new stimulus plan were likely to get from the Bank of Japan (BOJ) should be very good for gold.

And a jump in gold prices The reason for that is called leverage.

will

be

even

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miners.

When gold prices jump, a gold-producer sees its earnings accelerate at a faster pace than the price of the actual metal. I saw a hypothetical in a recent edition of USA Today that explains this perfectly. For example, if you own a mine that can produce gold for $1,100 an ounce, but gold is trading at $1,200, youre making a profit of $100 an ounce. But what if gold jumps from that $1,200 price level to, say, $1,500? Thats a price increase of $300, or 25%. For the gold miner, however, profits have jumped from $100 to $300 a 200% gain. Two miners to consider are Newmont Mining Corp. (NYSE: NEM) and Barrick Gold Corp. (NYSE: ABX). One of the ones that I like is Newmont, Peter told me. It has a very good dividend yield of nearly 3.2%. Its well-diversified geographically. The stock has gone sideways for a very long time and now the company is making a very concerted effort to keep its costs down. Then theres the Toronto-based Barrick, the worlds biggest gold producer. Barrick, like other miners, has seen that investors are not exactly thrilled with the performance of their shares, Peter said. The reason for that is that the company spent a number of years just growing its reserves. But it did so by using its own stock as currency to buy the smaller companies that we talked about earlier. That was very dilutive. But Barrick has suddenly gotten religion of the shareholder variety. In June, it fired CEO Aaron Regent after less than four years on the job: Board members were apparently peeved that the companys share price didnt move during that period, despite the huge run-up in gold prices. Going forward, just from the signs or evidence that Ive seen, the company has adopted a much more investor-attentive attitude and the ouster of the CEO is just one bit of that evidence, Peter said. The company is trying to focus on keeping its costs in line. And its trying to produce the hell out of what it already has in the ground. The odds are high that well have a pretty good six to 12 months to come.
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