Trading Gold Without Romney

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

While we may all breath a collective sigh of relief that the campaigns that spent an estimated $6 billion are over, investors are now forced to contemplate the future and consider where various asset classes will go from here. Stocks have been anything but subtle in expressing their distaste for the results, while gold has ticked slightly higher – the SPDR Gold Trust (NYSEMKT: GLD) is up just over 1% since the election was called for President Obama. Looking ahead, the same factors that made gold attractive prior to the election remain in effect, but they are now unbridled by the potential for a change of U.S. leadership. As such, gold is an attractive buy at current levels.

The Bullish Case for Gold

Ever since the Federal Reserve announced its latest round of quantitative easing, inflation concerns have helped to drive gold prices higher. While many experts have argued as to the specific path or timing of the coming inflation, it is generally accepted that without an end in sight to the Fed’s plan to pump $40 billion per month into the money supply, it is inevitable. Inflation fears are bullish for gold.

To put the magnitude of issue into context, in a recent report one analyst wrote: “The latest measure, referred to as QE-to-infinity-and-beyond, purchases $40 billion in agency mortgage-backed securities each month, for an unlimited amount of time. If the Fed continues this QE program, along with its Operation Twist program unsterilized, its balance sheet could hit $4 trillion or even $5 trillion within two years.” Furthermore, it is estimated that over the past four years the top central banks have already added $6 trillion to the financial system. While I do not join the conspiracy theorists who insist that most leading economic indicators are manipulated, at this level of cash infusion, inflation will arise.

While we all wait for the figures to show us what a quick trip to the grocery store has already revealed – that prices are going up – inflation is not the only positive catalyst for gold. The situation in Europe continues to be problematic, leaving little clarity as to when the economic instability will end. Domestically, unemployment remains high and, even with the broad figure showing some improvement, a closer looks reveals that the number of Americans who are either underemployed or who have given up looking for work is still alarmingly high. When these two factors are combined, the medium-term outlook for gold remains very positive.

Two Top Plays

While some investors may prefer commodity or ETF investments, both Freeport McMoRan Copper & Gold (NYSE: FCX) and Barrick Gold (NYSE: ABX) look attractive at current levels. While I do not put great stock in many of the most commonly used fundamental metrics when considering mining stocks, each of these companies is trading at an attractive P/E. The problem with these metrics is that, given the degree to which gold prices can vary, earnings and growth can be sufficiently variable to skew these figures, hiding the true value of the company.

Freeport is attractive because of its solid diversification. With gold remaining strong and copper prices continuing to firm, the company is well positioned at current levels. The company is well run and carries a 3.1% dividend yield. While the income element may lose some of its luster if the tax treatment of dividends changes as dramatically as expected, it still provides investors with some additional protection.

The appeal of Barrick is encapsulated in two factors. First, as the largest gold producer in the world, the company has a great deal of insulation against many of the fluctuations faced by other gold miners. For example, Barrick projects a production cost of $575 to $585 per ounce in the next quarter as compared to projections just shy of $700 for Newmont Mining (NYSE: NEM). Even with gold prices in the $1600 range, this is an important difference.

The other factor that favors Barrick is the renewed discipline of its management team. Rather than continuing to pursue a policy of growth at all costs, Barrick is deploying a portfolio approach that will look to maximize shareholder value in each project. This is the type of discipline that is generally lacking in the industry, but that sets the company apart.

Based on each of the above factors, both Freeport and Barrick should be considered buys at current levels.


Mr. Ehrman 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.

blog comments powered by Disqus