Is Barrick a Buy Ex-Dividend?

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

Shares of Barrick Gold (NYSE: ABX) are set to go ex-dividend on Nov. 28, and while this is not usually a catalyst to either buy or sell shares, it provides a good reason to consider the position of both the company and the overall gold market. Where gold, as represented by the SPDR Gold Trust (NYSEMKT: GLD) is up over 8% on a year-to-date basis, Barrick has declined by nearly 26% over that same period (see chart). Ultimately, gold continues to look attractive against an uncertain economic backdrop and Barrick is the best positioned of the major mining companies.

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GLD data by YCharts

Macroeconomic Factors

There are a few primary macroeconomic factors that are expected to continue to drive the price of gold higher over the next year: continued quantitative easing and the looming fiscal cliff are at the top of the list. Anyone who finds it refreshing to learn that the Federal Reserve and Congress may be collectively responsible for driving the price of gold higher and, conversely, the economy into the ground is in good company – sarcasm intended. In fairness, the ongoing economic weakness in Europe is another significant factor, so the U.S. government is not solely responsible.

While signs of inflation have remained largely absent from those statistics most commonly cited by the U.S. Bureau of Labor Statistics, most consumers are loath to miss the signs every time they shop for groceries. With the Fed pumping out a paltry $40 billion per month, inflation is coming. The good news for gold investors is that, according to a recent Bloomberg report, gold prices soared by 70% during the first two rounds of QE. While critics will point out that the precise structure of the first two rounds was somewhat different from the current perpetual course of QE4Ever, when an unlimited amount of capital is pumped into the economy, inflation is inevitable.

The second major factor that will likely help to drive gold prices higher is the looming specter of the fiscal cliff – a series of automatic tax hikes and spending cuts set to go into effect next year. The same Bloomberg piece reports that the “first face-to-face meeting between Obama and leaders from Congress on the fiscal cliff yielded optimism and few details about how it would be resolved.” The referenced optimism is undoubtedly the same sentiment that led legislators to agree to the sequestration plan that is one of the major components of the fiscal cliff. The takeaway is that while most “experts” believe the fiscal cliff will be avoided, the skill of Congress in snatching defeat from the jaws of victory should not be underestimated when it is your money at risk.

The mere concern about the fiscal cliff is sufficient to drive prices higher as it is generally accepted that should Congress drive us over the cliff, a recession awaits in the abyss below. While gold prices have stagnated a bit of late, these concerns are likely to drive prices faster the longer a resolution remains elusive.

The Peers and the ETF

When compared to its competitors, Barrick is the most attractive of the gold miners. Not only is the company the largest gold miner by production, it trades at a P/E of 10.5 relative to 218.3 for Newmont Mining (NYSE: NEM), 1135.9 for AngloGold Ashanti (NYSE: AU) and 21.8 for Goldcorp (NYSE: GG). Additionally, Barrick carries an operating margin of 35.2% relative to 34.7% for Newmont, 26.7% for AngloGold and 41.5% for Goldcorp, the only peer that runs more efficiently. Finally, it is the intangible of Barrick’s stated paradigm shift to increased discipline that makes the stock appealing.

The comparison to the ETF is more complicated. During recessionary periods, the commodity, and thus the ETF, tends to outperform. The miners are treated as businesses that struggle against the sputtering economy and this status can persist for an extended period. When this divergence reverses, significant profits may be captured.

Given the above factors, you may wish to allocate between GLD and Barrick to gain exposure to both the commodity and the strongest miner. An allocation distribution like this should also provide some hedge in the interim period. At current levels, Barrick and the GLD are buys.

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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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