by Travis Johnson, Stock Gumshoe | September 22, 2010 1:12 pm
You’ll be unsurprised to hear that the rise in gold this week has caused the copywriters to enter their frenzy stage — one half expects that there will be a run on replacement keyboards as these eager souls bang away and wear out their “G”, “O”, “L” and “D” keys.
Which doesn’t mean that this is the best time to buy gold, of course (If I could tell you when that is, I’d be sitting on a gold throne right now) — personally, I like to speculate in gold stocks from time to time, but I treat the actual yellow stuff as more of a savings vehicle than an appreciating asset. Still, if a miner can produce gold for $400 an ounce, that sets you up for a stock with pretty good profit margins.
So let’s find out who we’re told is this “safest gold stock on the planet,” shall we?
The ad in question comes in from Michael Lombardi, teasing the pick of the woman who edits his Explosive Mine Stocks newsletter, Inya Ivkovic. The letter normally sets you back $195/year but is, naturally, “on sale” right now for $89. Still, if you just want to find out which gold stock is called the safest, well, $89 is a bit steep for that — your friendly neighborhood Stock Gumshoe can sniff it out for you for the low low price of squadoosh. Zip. Nada. Nothin’. (Though as always, you’re welcome to pay if you want to — and I’ll love you for it).
The headline of the ad is, of course, extraordinarily compelling:
“Why the safest gold stock on the planet could be the easiest way ever to finally own gold”
And it’s probably a useful reminder that yes, gold has gone up incredibly over the last decade — but it’s still a niche investment, most US investors don’t invest in gold bullion or mining stocks, most households own gold only as jewelry. I’m sure that’s changed over the years, and certainly new investments have made it easier to get exposure to gold, particularly the gold-backed ETFs like GLD … but still, it’s arguable that most investors think about precious metals as an “asset class” even now (which is, if you listen to folks like Richard Russell, one more reason why the parabolic rise in gold has yet to really begin — there aren’t, to put it bluntly, enough suckers in the boat for it to sink yet).
So there area lot of teasers floating around lately that make essentially the same point: “It’s not too late, you can still own gold.” Whether or not that turns out to be true is, of course, a matter for future historians to decide — but with the US dollar under pressure again, and gold going up in dollar terms almost every day, you can certainly imagine that investors are feeling a little itchy, especially as folks predict $2,000 and $3,000 gold.
Here’s how Lombardi puts it in the teaser:
“With gold up about $30.00 U.S. an ounce for the week ended Friday September 17, 2010, the yellow metal sits at a new fresh record high of just under $1,300 an ounce.Are you getting our free Daily Update
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“Gold has gained 333% since 2002 when I first started recommending it. Some gold stocks have gone up in excess of 500% during that time period.
“My belief continues to be that most investors are still not aware of, and have missed, the 10-year bull market in gold bullion prices.
“In fact, the only mainstream site I could find that covered gold’s big move this past week was aol.com: ‘Gold hits new record high amid economic worries.’ It was one of the lead stories on the home page last Tuesday night and Wednesday morning.
“As far as other gold coverage goes…
“Other popular sites like yahoo.com and msn.com did not have stories on gold.”
So that’s how he feels about it. He also goes through the “three phases” argument about bull markets, which you’ve probably heard before (phase 1: it grows and only the smarties know, phase 2: the smart money jumps in, phase 3: the mainstream media picks up the story and the public starts speculating — he thinks we’re in phase 2).
And then we get to the tease about our specific stock:
“I’ve been trying to step out of my “gold bug” shoes and figure out what I would want as a new gold investor…
“Bottom line, I’d want a safe, easy way to get started but with lots of growth potential.
“So, that’s exactly what I’ve found for you.
“It’s a gold stock company…but, it’s almost like a ‘Blue-Chip’ in the industry, as far as being a safe place to put your money.”
So that sounds pretty good — I know a lot of my readers are already avid speculators in junior miners, and we’re all looking for that unknown stock that’s sitting on a top secret gold deposit … so I don’t end up writing about the “big” mining stocks very often. But this tease is clearly for a return to some semblance of sanity for folks looking to “get started in gold.”
And then we get the specifics to help us nail down this stock idea:
“Safest Gold Stock on the Planet Could Be the Easiest Way Ever to Finally Own Gold
“The company is the gold industry leader, with interests in 25 operating mines and a pipeline of projects located across five continents, in addition to large land positions on some of the most prolific mineral districts.
“The company has:
“The gold industry’s only ‘A’-rated balance sheet—talk about safety…that beats many ‘Blue-Chips’
“The gold industry’s largest unhedged production and reserves—these guys believe in the future of gold and are willing to stand behind it.
“Two advanced projects in construction that are expected to collectively contribute 2.4 million ounces of low-cost, average annual production at full capacity—with the current average cash margin per ounce of gold at $748.00, these two new projects alone could add $1.795 billion to the company’s cash flow!
“Listings on both the New York and Toronto Stock Exchanges with easily traded shares.”
And they go on to tell us that this stock is increasing the dividend by 20%, and going from a biannual payout to a quarterly dividend. And that they’ve got a “27-year track record.”
So that’s more than enough to feed into the mighty Thinkolator — and indeed, we needn’t thinkolate on it all that much anyway, since much of the teased data is taken word-for-word from the company’s website: This is Barrick Gold (ABX in both NY and Toronto), which is by almost any measure the biggest gold miner in the world, with a market cap of about $46 billion and sales over the last year of nearly $10 billion.
And yes, Barrick did raise the dividend from 40 cents/year to 48 cents, and change it to a quarterly payout (so 12 cents per quarter) — that puts it in the top tier of big miners who pay dividends, but it’s still just a 1% yield so that’s not really saying much (the major miners like Goldcorp (GG), Newmont (NM) and AngloGold Ashanti (AU) generally pay out dividends of somewhere between .3% and 1% annually).
So really, this isn’t going too far outside of mainstream thinking: The biggest company is the safest. And it may well be true, though “safe,” of course, is in the mind of the beholder. The general consensus among investors seems to be that you want to own gold stocks to get leverage to the price of gold, but that hasn’t necessarily been the case during the last five years or so of dramatic gold performance (that’s cherry picking to some extent, if you go back further or choose a different time period results may differ) — I pulled the chart below from Yahoo Finance, it’s just a simple comparison of Barrick (ABX), Goldcorp (GG), Newmont (NEM), Anglogold Ashanti (AU) and the miners index (GDX) and the physical gold ETF (GLD) to represent the metal itself. You can see that over that time gold performed significantly better than these big miners, with Goldcorp being the only one that even came close, and, perhaps more importantly, that it was far less volatile — it didn’t dip nearly like the miners did during the financial crisis.
And here’s a one-year version of that chart, just to be fair:
So over the past year, Newmont did outperform gold (maybe in part because of their big copper exposure as well), and Barrick came close enough — but as you can see, the “leverage” to gold seemed to be more pronounced on the downside and most of the big miners did worse than the metal. Over two years it’s a different story, but that’s because so many miners collapsed entirely during the crisis that several of them did dramatically better than gold coming out of that collapse in the Fall of 2008.
I’m not sure if this means much of anything — you could interpret it to be that gold miners have a ways to go to “catch up” with gold, or that companies in an extractive industry should underperform the commodity because they deplete their assets over time (though all of these firms actively add reserves, of course, both organically through exploration and drilling and through acquisition of junior miners). Or you could just say that gold as a metal has appeal as a store of value and safety that you don’t get by owning a capital-intensive industrial company that happens to be producing gold.
For what it’s worth, I think the big miners are probably “under owned” by resource investors — everyone likes to pick a sexy junior stock and be the only one on the golf course who’s heard of it, but with input costs relatively under control (at least, compared to the fears they had when oil, a major cost driver, was over $150) and the price of their end product soaring, you’d think they’d be putting together some remarkable numbers over the next few quarters — and the fact that all of the big miners have now closed out their hedge books means that they should enjoy the gold boom.
Unless, of course, the fact that the big miners have all stopped hedging means that we’re at the very top of the market.
You also don’t have to pick a “big mine” winner if you’re thinking that the large gold miners are the best bet at this point in the market, you could just go with the index of major gold miners, the ticker for that ETF is GDX and Goldcorp and Barrick and the rest of the names you’ve probably heard of dominate the portfolio. Of course, the dividend is lower at .23%, but at some point that seems like splitting hairs with such a teensy yield — you’ll need to let dividends compound for years and years to get any real benefit from Barrick’s 1% dividend … though it would help, certainly, if they opt to keep boosting it every year.
So what do you think? Sick of gold? Excited to see if the big miners can finally take advantage of their operating leverage to gold prices and soar higher than the metal? Prefer the little tiny junior guys that have more chance to jump by 500% (or fall by 100%) on a big discovery? Let us know with a comment below.
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