Why Gold?
Callum is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Shiny!
What is yellow and holds a lot of value? What is George Soros betting big on? What does every Austrian economist love?
GOLD!
PRINT PRINT PRINT!
Last week Ben Bernanke said in his press conference that the Federal Reserve would do another round of bond buying or QE 3, but this time it is open ended and will continue to happen unless there is a meaningful reduction in the unemployment rate. Already Ben has flushed financial markets with $2.3 trillion from quantitative easing 1 and 2, and undergone 2 rounds of Operation Twist, buying up $667 billion of long term treasuries with the money coming from maturing short term treasuries. What is really big this time is that QE is open ended, so nobody knows, probably not even Ben himself, how much more bonds the FED is going to buy. This leads to the devaluing of the US dollar, which props up commodity prices and stokes inflation. Inflation fears lead those to seek assets that are hedges against inflation. In this case, that would be gold. Gold is trading at around $1,770 an ounce right now, but with the ECB and the US trying to print their way of their problems; it should head much higher rather soon.
Will History repeat itself?
When the first round of QE was announced, gold prices surged 10% is a months’ time and was up almost 40% by the end of 2009. The second round of QE saw the price of gold rise 7% by the end of 2010. So far the price of gold is up about 2.5% since the announcement. But, because this round of QE is open ended, it could be even bigger than QE 1 and 2 combined. This would lead to a massive rally in gold prices. Even if it was similar to QE 2, gold should still see a 5% upside in the near future.
The direct play
SPDR Gold Trust (NYSEMKT: GLD) is an ETF whose price is almost parallel to the price of gold. If you want a simple way to play gold prices rising this is the one to go to. Another ETF is iShares Gold Trust (NYSEMKT: IAU), which also tracks the price of gold. The benefit of these ETF's is you don't need to go set up a futures trading account and make things complicated, you can just treat gold as any other stock you would trade.
The indirect plays
Major gold miners will also benefit from the rise of gold. Freeport-McMoRan Copper & Gold Inc (NYSE: FCX) is a large producer of gold and is also a large producer of copper. FCX will benefit from both a rise in gold and in copper. Copper prices are also up since QE 3 was announced. Barrick Gold Corp (NYSE: ABX), the largest gold producer, is also an obvious beneficiary. If you want to diversify within the gold mining sector, Market Vectors Gold Miners (NYSEMKT: GDX) is an ETF which allows investors to easily spread-out the risk of investing in an individual company but still provide solid returns.
Breakdown of FCX
Freeport-McMoRan Copper & Gold obviously mines both gold and copper. Quantitive easing has caused gold prices to rise, but what about copper. Well, lucky for you if you are a shareholder or might want to become one, if copper is rising. Since QE 3 was announced, copper prices have risen by about 5%, and during QE 2 copper prices went up 11% by years end. What will also help push prices higher is China's $150 billion infrastructure "rapid approval" stimulus. FCX has low levels of debt on its balance sheet at 21.25% of equity as of last quarter. There is no reason why FCX shouldn't benefit from QE 3, and it is slightly diversified with operations in 2 metals. This way if gold or copper prices fall, you still have the other side to help make up the difference. FCX trades at 2.5 book value with a PE (TTM) of 12.9. Also, FCX pays a 2.9% dividend with a low payout ratio of 32%.
Breakdown of ABX
Barrick Gold Corp is the world's largest gold producer the best "pure play" gold miner around. If you are bullish on gold prices but don't want to buy gold futures or an ETF, this is the play to get into. Barrick does have some debt on its balance sheet, 56.4% of equity as of last quarter, but that isn't too troublesome as long as they keep that in check. ABX is projected to grow its EPS by 16% annually over the next 5 years, but that was before QE 3. Trading at 1.8 times book and a PE (TTM) of 10.3, ABX looks to be cheap. It also pays a dividend of 1.9%, with a very low payout ratio of 15%.
Final Thoughts
While the FED and other central banks around the world continue to flood the marketplace with "free money", it is up to you as an investor to find the best way to play the market while the FED is on the steering wheel. I see gold prices heading much higher, and by years end we will see $2,000 an ounce for gold. Copper will also rise by at least 5% more if history is as measure of what to expect. While some of you may applaud the FED for QE and others may hate it for it, it doesn't mean we shouldn't get a little bit richer off of it.
callumturcan has no positions in the stocks mentioned above. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
