A Bear Talks Gold
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I own several Hussman funds and, thus, make sure to read John Hussman's weekly market and fund commentary. He's probably one of the smartest mutual fund managers I've ever had the pleasure of talking to and his weekly commentary is similarly educated. Last week, he noted an increased allocation to gold in one of the funds he manages. I took a look at the list of gold stocks he's owned in the past, and found a few in which dividend investors might be interested.
Hussman has been a bear for quite some time, going so far as to suggest that we are currently in a recession. Add to that what he believes to be a material overvaluation in the market based on historically high profit margins, and he expects poor returns, at best, over the next few years, with the distinct possibility of a severe market selloff.
Although you might expect such an opinion to lead to a large exposure to the yellow metal, that isn't how Hussman invests. While the market may take risk on/risk off trades, Hussman's investment approach is more nuanced. So, when he noted that Hussman Strategic Total Return Fund (HSTRX) had increased its exposure to gold stocks to 15% of assets, it meant he sees value in that segment right now.
Specifically, Hussman notes that “the ratio of the spot gold price to the Philadelphia Gold Index (XAU) is presently near the historic high it reached during the credit crisis, and several gold shares presently have higher dividend yields than the S&P 500 itself – a remarkable change from historical norms.” It is just such anomalies that create buying opportunities. Although he sees a risk that investors are looking at gold as a risk on asset, he believes that investors will eventually see them as a key inflation hedge and, thus, bid up the price of gold miners' shares to more normal spread levels.
A discussion of gold wouldn't be complete without bringing up the world's largest gold producer, Barrick Gold. That said, the company has been dealing with material headwinds of late, including falling production and rising costs. That's not a good combination. Add what appears to be a poorly timed acquisition to the mix and it isn't surprising that there's a new CEO at the helm.
While change can be good for a struggling company, it also brings with it additional execution risks. That said, the new CEO is taking time to review all of the company's business, which could be a good sign that rash decisions aren't going to be an issue. Additionally, the company has a number of projects in the works that should keep rising costs in check.
At the end of the day, Barrick, yielding a little over 2%, is large and well diversified. Investors have afforded it a premium valuation compared to the dividend yields offered by its smaller rivals. With so much going on at the company, it doesn't seem appropriate as a dividend investment for conservative types, but it might interest more aggressive investors who believe gold stocks are set to rise sharply. That said, the dividend disbursement has been on an upward climb the last couple of years. Investors should keep an eye on the new CEO, however, to make sure that the new boss doesn't take write offs claiming the old boss made the mistakes.
Newmont is the second largest gold company in the world. And like Barrick, it faces a management change. Having already written down the value of some of its mines, the new CEO could reset virtually every company and public expectation by simply blaming past management for being too aggressive. This is a time honored tradition in the business world would turn 2013 into a transition year.
Newmont production costs are about average for the industry and it is financially healthy. Although some new projects are more expensive than planned (and those costs could go higher still based on the CEO change), the company seems to be positioned well to benefit from strong gold prices. Its 3.1% dividend yield is more compelling than Barrick's and likely offsets some of the risk that both appear to share. Although Newmont shouldn't be the only gold stock you own, as part of a collection of gold stocks it might be worth a closer look.
Gold Fields Ltd is also among the largest gold miners in the world, with a heavy concentration on South African assets, unlike Barrick or Newmont. Its production costs tend to be on the high end of the industry, though, which is a negative. However, it has material reserves, which helps to ensure its long-term viability. It is also working on expanding production at key mines, which should help keep costs in check. That said, gold is currently trading at elevated prices that aren't likely to drop if Hussman's expectations are correct about a renewed focus on inflation protection, so high production costs may not be that big a concern.
Still the company's earnings and dividends have been volatile. This isn't a stock for the feint of heart. However, gold is a hard asset that has historically provided some protection during difficult times. For income investors looking for gold exposure, this stocks 3%-plus dividend yield might be an interesting way to prepare the worst of times while getting paid to wait for Hussman's bearish prognostications to come to fruition.
ReubenGBrewer has no positions in the stocks mentioned above but does own shares in several Hussman funds, including Strategic Total Return Fund. 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!