Is Barrick Still on Top?

Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Just as the range of opinions on the near-term future of gold is diverse, so are those opinions which address the best way to gain exposure to the popular yellow metal. While the options range from investments directly in the commodity – in either physical gold or financial trading instruments – to investments in exchange-traded-funds (ETFs) or individual mining stocks, the consensus is that an allocation to gold is appropriate. Given a range of global macroeconomic influences, including surging development costs and unchecked quantitative easing, Barrick Gold (NYSE: ABX) remains the strongest individual gold miner and is worthy of inclusion in your core portfolio.

Macro Factors

The recent announcement by the Federal Reserve that it is beginning an indefinite period of quantitative easing is extremely bullish for commodities, particularly gold. During periods of inflation or the expectation of inflation, commodities are attractive as a solid store of wealth. With the Fed promising to pump $4 billion per month into the economy until the employment picture improves, it signals that inflation has ceased to be a primary concern of the Fed. Early indications have seen inflation remain in check thus far, but with this type of pressure by the central bank, inflation seems inevitable.

General economic uncertainty also aids gold because precious metals are considered safe haven investments against political and other types of risk. Not only does the Fed’s QE3 push on the money supply, it signals that economic weakness is an ongoing concern. This all but begs the precious metal markets to spike as investors rush for cover behind such a clear message. The out for the Fed is if the message alone drives economic expansion sufficient to make QE3 brief. This would limit the potential for inflation, but is considered a remote possibility.

The European Conundrum

Where the picture becomes subtle and elegant for some and confusing and frustrating for others is when the joint forces of Eurozone pressure are considered. Last week, in the face of troubling news out of Spain and Greece, gold slid. This dip seems incongruous with the argument that a weak economy is a bullish occurrence for precious metals – this is further evidenced in the speculation that arose suggesting that the dip was a result of a minority belief that subsequent economic data would show the economy to be far stronger than expected.

To solve this disconnect, you must look at the immediate interplay between negative news in Europe and the currency markets. Chaos in the EU tends to be bullish for the U.S. dollar, which is in turn bearish for gold. A strong dollar is a negative for gold, meaning that when the situation in Europe worsens on a relative basis, gold may falter in the immediate-term. The job of the gold trader is to judge if the strengthening dollar is sufficient to offset or override the general weakness in the economy and the positive impact of other macro news. Ultimately, the market’s immediate reaction to currency news tends to be overshadowed by the state of the global economy. Gold looks strong moving forward and should perform well.

Why Barrick?

While there are a near infinite number of ways to play gold, an investment in Barrick still appears to be the best way to gain gold exposure. The commodities markets have various limiting factors for most investors and the slippage involved in trading physical gold is prohibitively high. ETFs are a reasonable alternative, but then you get exposure to many lesser companies as well as the strong ones.

Barrick remains the largest gold miner in the world, boasting the largest reserve of 140 million ounces, over 40% of which are in North America. In light of the fact that many gold miners including Barrick, Goldcorp (NYSE: GG), Kinross Gold (NYSE: KGC) and Barrick’s JV partner NovaGold Resources (NYSEMKT: NG) have each recently passed on development projection due to mounting development costs, the proven and probable reserves of each respective miner in critical.

Barrick’s announcement of its canceled project caused NovaGold to be severely punished by the market. The cancellation is also a demonstration of Barrick’s new discipline under its new CEO. The company has abandoned the “growth at all cost” mantra and is looking to streamline its operation. The superior level of reserves allows the company to take such an approach. To put the figure in context, Goldcorp has 64.7 million ounces of proven and probable reserves, while Kinross has 62.6 million ounces. NovaGold is not in the top twelve in this category.

The Trade

While there are other factors that favor Barrick – a P/E ratio of 10.2 relative to 28.4 for Goldcorp and negative earnings for Kinross – the strength of Barrick’s management and its superior level of reserves make it the best play in gold. The global economy is showing signs that a major bull market in precious metals is likely, and the time to invest is now. Based on all of these factors, Barrick is a buy for your core portfolio.

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.

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