Buying Barrick on QE3, er QE4-EVER
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Gold prices have looked strong over the past several weeks based on a near-perfect trajectory of global macroeconomic news items. First, the Fed announced that it stood ready to provide needed “policy accommodations” to help stimulate the economy. Then the ECB announced its uncapped bond-buying program, meant to target economic stimulus in the Eurozone. Next, the U.S. jobs report set the stage for the next round of quantitative easing to be announced at Thursday’s regular FOMC meeting.
The whole progression was neat and orderly and as smooth a set-up as one could ask for from the markets. Right up until it was not. Given the Fed move, Barrick Gold (NYSE: ABX) is a must have in one’s portfolio.
Gold & The Fed
The reason that the price of any trading vehicle associated with gold surged on the Fed’s announcement is that, rather than following the clean march towards QE3, it skipped QE3 and moved right to QE4, as in 4-EVER.
Under the new plan, in addition to keeping rates at artificially low levels until 2015 – a one year extension on the previous plan – the Fed plans to begin buying mortgage-backed bonds, and it intends to keep on buying them until the plan works.
While I hate to paint the picture of “Helicopter Ben” tied to an ACME rocket that reads “Full Employment or Bust” on the side, while the Fed Chair manically holds a burning match, the imagery is apt. For the uninitiated, the potential for inflation has never been higher, making investments in precious metals particularly attractive. The Fed made clear that fighting unemployment would be the order of the day indefinitely.
While the Fed plans to spend a scant $40 billion per month working to stabilize the economy, on top of the few trillion that was spent during QE1 and QE2, at some point this will add up to real money. In an interview with Jeff Macke, renowned investor Jim Rogers explained his view that given the inescapable nature of cyclical slowdowns and recessions, it is the monumental size of U.S. debt that will cause the next downturn – in 2013 to 2014, according to Mr. Rogers – to be so severe. While there may be a stimulus effect on the economy in the short-term, at some point inflation will kick in. This completely leaves aside the issue of unwinding these trades over whatever decade follows the end of QE-Right Now. If my obvious feelings about the topic leak through, it is as much about the state the economy will be in for my children as it is about losing a decade that should have represented one of the most lucrative of my professional life.
Regardless of one’s view of the wisdom of the decision, the reality that inflation is coming cannot be escaped. When this kicks in, commodity investments, particularly those in gold, will likely outperform all other asset classes. Gold has already begun to appreciate, but should have plenty of upside remaining.
Trading the News
News of the Fed plan was very positive for gold, but even more positive for gold miners. Where the SPDR Gold Shares (NYSEMKT: GLD) was up 2.02% in Thursday’s session, the Market Vectors Gold Miners ETF (NYSEMKT: GDX) was up 5.02%. Barrick is one of the largest components of the GDX, but miners across the board rose of the news. Goldcorp (NYSE: GG) was up 5.46% and AngloGold Ashanti (NYSE: AU) was up 3.84%.
While there is a reasonable argument for each of the above ETFs, Barrick remains the best play in gold. Miners have underperformed the commodity over an extended period, leading many to believe that this divergence must correct itself – this favors owning GDX over GLD. On the other hand, while the Fed stimulus has had an immediate positive on the major indexes, over the longer-term, inflation is bad for stocks – this would favor owning GLD over GDX.
Barrick remains the top choice, not just because of its overall fundamental profile, but because of the direction being espoused by management. The stock carries a trailing P/E of 10.2 relative to 28.2 for Goldcorp and 1033.9 for AngloGold, a PEG of 0.12 relative to 1.33 for Goldcorp and 0.12 for AngloGold, and an operating margin of 42% relative to 45% for Goldcorp and 32% for AngloGold. While these statistics paint a favorable picture, it is the new era of discipline that gives the company the edge over other options. Barrick’s CEO has made clear his intention to focus the company on a more responsible path. With a great big shove from the Fed, Barrick is a name everyone should own at current levels.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. 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.