3 Investments For When The Gold Sell-Off Ends

As 2012 came to a close, investors increasingly questioned the wisdom of owning gold or gold-related stocks and funds. After all, a commodity known as an inflation hedge is of dubious value when inflation is nonexistent. And for investors who still expected the Federal Reserve’s aggressive stimulus efforts to eventually fuel inflation, patience was starting to wear thin.

What began as a steady exodus out of gold in the winter morphed into something a lot more dramatic this spring. In the past few months, gold has endured a pair of scary plunges that has pushed even its most ardent supporters to the sidelines. Gold prices now sit at their lowest levels in nearly three years.

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But does the Fed’s recent announcement that it will begin to wind down its massive quantitative easing (QE) program change the picture for gold? After all, part of gold‘s weakness had stemmed from rising expectations that the Fed would soon wind down the QE program. Now that rumor has become fact, has the gold sell-off ended?

One possible scenario for a gold price rebound: The Fed’s retreat from QE means that we’re moving into the next phase of a grand government financing experiment that has no precedent. Will the coming months represent a quiet phase for the stock and bond markets as investors take the Fed’s changing policies in stride? Or should we brace ourselves for greater volatility and economic uncertainty?

If that happens, gold could quite easily move back into vogue, as it is a favored investment whenever there is broad confusion about the market and the economy, as was the case in 2009, 2010 and 2011. Gold finished the past trading week at $1,292 per ounce, and any move back above $1,320 could be a sign that gold bulls are returning. So keep an eye on current gold prices, because if the selling phase has indeed passed, then the stage may be set for the next bull market in gold.

Investors have many ways to invest in gold. Let’s look at three very different options, each with their own risk and reward profile.

1. Barrick Gold (ABX)
This is the world’s largest gold miner, with proven and probable reserves of around 140 million ounces of gold (along with a lot of copper and silver). Not only has Barrick been affected by falling gold prices and the diminished profit spreads that that implies for producers, but the company has been beset by its own major mining problems in the Dominican Republic and Chile. Notably, both of those problems are being resolved, and output should return to normal later this year.

Even if you don’t expect gold prices to rebound from here, shares of Barrick Gold now appear oversold as they are still suffering from the perception of the problems noted above. Analysts at UBS, for example, think shares are worth $24.50, or nearly 50% above current levels. If gold prices rebound in coming quarters, then that price target would surely rise higher still. Merrill Lynch has an even higher $29 price target, which equates to 1.5 times the net asset value of its mines. That multiple has historically stood between 1.0 and 3.0; it stands just below 1.0 at the moment. (My colleague Chad Tracy took his own deeper look at Barrick’s valuation earlier this month.)

2. Royal Gold (RGLD)
Some investors have soured on gold miners, which tend to repeatedly face unexpected delays in permits and cost overruns on major projects and engage in poorly timed pricing hedges. This gold company skips all that and simply collects royalty checks. Royal Gold started to raise capital in 1990 and now has stakes in more than 200 properties, 36 of which are currently producing gold and throwing off royalty income.

So what does the company do with all those royalties? Roughly 30% is paid out as dividends, and the rest goes right back into the next crop of mines. Royal Gold has an interest in 23 mines still in development, and another 100 that may be put on track for development in the next few years.

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Yet the reason this stock now holds appeal may not be apparent. Royal Gold is sitting on nearly $400 million in net cash and has an untapped $350 million credit line at its disposal. The company has a history of periodic buying sprees when smaller gold miners run into financial distress. And with gold below $1,300 an ounce, these junior miners are having a hard time accessing capital to develop their mines. Royal Gold provides cash to these miners at times like this — and reaps the rewards when gold process rebound and royalty payments spike.

3. Direxion Daily Gold Miners Bull 3X Shares ETF (NUGT)
Talking about this exchange-traded fund (or ETF) right now would seem foolhardy. It is so heavily leveraged to the price of gold that its shares have plunged from $97 in October 2012 to a recent $6.50, easily making this one of the worst investments in recent memory.

Yet that kind of price action can work both ways. So if you are expecting even a modest rebound in gold prices, then this ETF would likely double or triple from current levels in a very short time. To give you a sense of this stock’s volatility, gold prices rebounded 1% on Friday, but this ETF rose a solid 2%. Of course this isn’t an investment, it’s a speculation, and as such, should be just a tiny piece of any portfolio.

Risks to Consider: The global economy is showing signs of distress, and if China or Europe weaken further, then gold continue its downward spiral.

It’s unwise to call a bottom for gold. Instead, keep an eye on the price action. If gold stabilizes at current levels and moves back up above $1,300 for a number of sessions, that could be a sign that sellers have been flushed out.

Source: http://seekingalpha.com/article/1518672-3-investments-for-when-the-gold-sell-off-ends

Are Gold Miner Dividends Sustainable?

Although the gold price has proved volatile in recent months, many gold miners continue to offer investors an attractive dividend. But is it sustainable?

For investors looking for a dividend from the large cap gold miners, the last decade and a half has proved fruitful. Frank Holmes, CEO and chief investment officer of US Global Investors, recently noted that the world’s top 20 gold companies have increased their dividends at a compound annual growth rate of 16% over the last 15 years, while gold only rose 12% annually over the same period.

At the moment, Barrick Gold’s (NYSE:ABX) dividend yield is 3.90%, while Goldcorp’s (NYSE:GG) dividend yield is 2.07%, Newmont Mining Corp.’s (NYSE:NEM) dividend yield is 4.09%, and Kinross’s (NYSE:KGC) dividend yield is 2.48%.

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The miners themselves were optimistic about dividends heading into this year. According to PwC’s 2013 global gold price report, 100% of senior miners surveyed planned to use cash to continue to pay dividends this year, with 80% saying that they planned to increase the proportion of profits paid as a dividend.

Indeed, speaking about the climate for M&A in the gold space at the Bloomberg Canada Economic Summit last month, Barrick Gold president and chief executive officer Jamie Sokalsky said that investors are hoping for free cash flow, which he said they would perhaps rather see “returned to them in a higher dividend at some point.”

All else being equal, dividends from the gold miners do help mining equities look more attractive to gold ETFs, explains Elizabeth Collins, director, basic materials equity research at Morningstar.

“But unfortunately for gold mining equities, gold ETFs provide leverage to gold prices without the added headaches of cost inflation, production level disappointments, and political risk,” she adds.

This week, Australia’s Newcrest Mining (ASX:NCM) announced that, as a result of a reduction in profitability for the 2013 financial year following a sharp decline in the gold price, it expects that it will not pay shareholders a final dividend.

The company notes that as growth in production and earnings continues from two of its mines over the coming years, and costs and capital expenditures are reduced further, it “is confident it will be well-positioned for both an accelerated reduction in debt levels and a return to dividend payments.”

Back in April, Newmont Mining — which uses a gold price-linked dividend policy, with each quarterly dividend based on the company’s average realized gold price for the preceding quarter — cut its dividend to $.35 per share, based on the average London PM Fix of $1,632 per ounce for the first quarter of 2013. In February, the company’s quarterly dividend was 42.5 cents per share based on the average gold price of $1,718 per ounce for the fourth quarter.

Certainly, the ability of many miners to continue to pay an attractive dividend depends on the gold price’s moves. Earlier this year, RBC Capital Markets ran a “downside stress test” on North American gold producers, to see how robust miners’ balance sheets are. While the test found that most of the companies appear to be able to weather gold prices of $1,500 or $1,4000 per ounce, at $1,200 per ounce, within 24 months most companies would have to cut capital spending and dividends.

“I think many gold miners’ dividends are sustainable as long as gold prices don’t fall. Many miners are cutting back on exploration and capital expenditures in order to boost free cash flow and return more cash to shareholders. However, many gold miners’ dividend levels are either directly or implicitly linked to gold prices. So if gold prices fall, so too would dividend levels,” says Collins.

Source: http://www.minyanville.com/trading-and-investing/commodities/articles/GG-NEM-ABX-KGC-NCMAX-gold/6/7/2013/id/50235

Is It Time to Start Freaking Out About the Gold Supply?

You hear a lot about central banks and gold reserves these days.

Back in February, Germany decided to start repatriating some of its U.S.- and Paris-held gold. And in March, Switzerland announced plans to vote to do the same, as well as to stop selling its gold reserves.

Moves like these aren’t necessarily out-of-the-ordinary. After all, if you’re a gold buyer, it’s generally not a good idea to buy and hold it sight unseen.

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But many can’t help but wonder whether Germany, Switzerland and potentially other countries doubt perhaps not the purity of the gold bars held in their name, but rather their existence.

While we expect their gold is ready for the taking, it does make you wonder why, in Germany’s case, it will take seven years for the wealth transfer to be complete.

Whatever the reasoning for the timeline, it’s a lesson to us all that the companies storing and selling your bullion should be able to produce your gold upon request.

But let’s suppose the bullion isn’t where it’s supposed to be … and the governments have to go and buy gold on the open market. Will there be enough available?

Well, there’s plenty in the ground. So that may depend on whether several miners can go forward with their plans to get it out. And unfortunately for some big gold projects, miners are finding themselves between a (gold) rock and a hard place …

Last week, Atna Resources (ATNAF) announced that low gold prices have “temporarily downsized” the ramp-up of underground mining operations at its Pinson Mine near Winnemucca, Nevada. Atna’s stock was punished mercilessly.

Pinson was expected to yield 50,000 to 57,000 gold ounces this year. Atna had hoped to increase that production to as much as 200,000 gold ounces annually.

Nope. Not gonna happen. At least, not at these prices.

But the Pinson Mine is small potatoes, right?

On Monday, Mexico’s Minera Frisco (MFRVF), owned by billionaire Carlos Slim, said that production at its gold and silver mine El Coronel was suspended due to “illegal” worker action.

El Coronel produced 42,211 ounces of gold and 4,234 ounces of silver in the first quarter of 2013, and was planning on ramping up production.

A production ramp-up? Nope, not gonna happen now.

But that’s still small potatoes, right?

On Friday, Roque Benavides, chief executive of mining company Buenaventura, talked to Reuters about Conga, the monster, $4.8 billion Peruvian gold project that is being developed by Newmont Mining (NEM). Buenaventura is junior partner on the project.

Protests flared up at Conga again last week. And these aren’t placard-holding hippies singing “Kumbaya.” People have died in clashes with security forces at the Conga project.

The project was suspended in November 2011 at the request of Peru’s central government, after increased protests in Cajamarca by anti-mining activists. Benavides says that those protests, if they continue, could mean the end of the project.

Conga could have an average annual output of 580,000 to 680,000 ounces of gold and 155 million to 235 million pounds of copper during its first five years.

Now THAT’S big potatoes.

On Monday, an Indonesian government official announced that Grasberg, an Indonesian copper mine owned by Freeport-McMoRan Copper and Gold (FCX), will not be able to resume output for three months until a probe into a deadly tunnel collapse is completed.

Grasberg is known as a copper mine — the third-largest in the world, in fact — but it’s also the BIGGEST gold-producing mine in the world, averaging more than 1 million ounces of gold production each year for the past three years.

That’s HUGE potatoes!

Should We Start to Worry
About Gold Supply Now?

The word on the street is that it’s getting tougher and tougher to buy physical gold.

Maybe that’s why people in Singapore were paying a premium of $7 per ounce for physical gold last week — a new record. And if you want to buy physical gold in Singapore in June — too bad! Orders put in now won’t be filled until July.

  • Maybe that’s why the Indian government just raised the import tariff on gold — AGAIN — on Sunday, in desperate bid to clamp down on consumer demand for the yellow metal. And this is happening during an economic slowdown! What’s going to happen when India’s economy starts firing on all cylinders again?
  • Maybe that’s why sales of physical gold are hitting “astronomical” levels in Dubai. Expat Indians are rushing to buy gold in Dubai and ship it home, perhaps in a bid to get around India’s onerous new gold-import restrictions. Dubai merchants report that their sales have shot up by 400% after the recent price plunge.
  • Maybe that’s also why sales of American Eagle gold bullion coins by the U.S. Mint — despite dropping in May from April — are still on track to set a new annual sales record.

The buyers are there. The suppliers are getting thinned out. The question of the day may soon become: “Got physical gold?”

What’s your answer going to be?

Got Gold (Miners)?

Miners look good too, of course — at least, the good ones do. That’s why I recommended two new gold miners to my Junior Resource Millionaire subscribers on Friday. Are those positions up? Yup! Are they likely to go higher? Hey, nothing’s certain in this world, but I think the odds favor this trade.

And let’s look at the Market Vectors Gold Miners ETF (GDX), a basket of leading gold miners.

Despite recent bad news from Newmont and Barrick Gold (ABX), which is having its own troubles with a multibillion-dollar project, the gold miners seem to be breaking out. Maybe it’s because the gold they do own is suddenly looking a lot more valuable.

The real test will come at the 50-day moving average. Good luck to all.

If you’re doing this on your own, do your own due diligence.

All the best,
Sean

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Source: http://www.uncommonwisdomdaily.com/is-it-time-to-start-freaking-out-about-the-gold-supply-16433