The Gold Stock at the Top of My List

After the tech bubble in March 2000 popped and before the recent financial and credit crises struck, at least three sectors have managed to post significant gains: bonds; real estate; and small-caps. For some reason, however, gold remained under the radar for most investors. Yet, since the stock market peak, prices have climbed past many psychological marks. The shares of companies that mine the metal have gone for the ride.

The perennial question for any gold investor is whether to buy bullion or gold mining stocks. I favor gold stocks over the higher risk of other commodity options.

While generally favoring gold stocks, I view Newmont Mining Corporation (NYSE/NEM) in particular as a really good investment, because we see this stock bringing value to your portfolio for years to come.

Without a doubt, for those investors looking to hedge their portfolios with gold exposure, Newmont Mining deserves to be at the top of the list. This company stands out among other players for two reasons: 1) size; and 2) low production costs, even in the rising price environment.

Over the years, Newmont has grown rapidly through mergers and acquisitions, as well as the development of its existing reserves. This strategy resulted in the company’s diversified risks; namely, unlike junior producers, Newmont doesn’t depend on one or two of its mines for its future and it is certainly not exposed to politically unstable regions.

In that regard, the risk is spread out, as the company continues to maintain an aggressive worldwide exploration program and is actively participating in and taking advantage of the ongoing industry consolidations.

In terms of costs, Newmont enjoys an overall favorable cost structure, although the recent quarter painted a very bleak picture when it came to capital expenditures. Its South American operations are the major factor in keeping the company’s costs down. This is particularly true with the Yanacocha property in Peru, where cash costs are in the lowest per-ounce price range.

The company’s diversified portfolio of low-cost mines allows it to remain profitable, even during prolonged weakness in the gold bullion market. In the past 10 years, Newmont has posted net losses three times; yet each year it has generated positive operating cash flows.

Over the past five years, Newmont’s investment rate has been around 60% (the investment rate is the percentage of profits the company has returned back to its business operations).

This strategy is consistent with what most producers do; return every dollar earned, and then some, back into the operations. However, with Newmont, it seems to come with ease, adding further to its attractiveness, as it can grow even during periods of depressed gold prices and at a lower investment rate.

Newmont’s cash flows are highly sensitive to the price of gold, because the company remains largely unhedged, thus exposing itself to the whims of the gold market. However, market data and the current economic environment suggest that the gold market is dancing with the bulls, so the company’s unhedged strategy promises profits, as the price of gold rises further.

This is the stock that saw its market price go up double percentage points over the past three years and its sales double every three years. The company is growing aggressively—both internally and by acquisitions—and has sufficient cash in the bank to finance that growth.

Newmont Mining appears to be the perfect choice for investors looking for a company with excellent fundamentals, a proven track record, and experienced and knowledgeable management. Note that this is not a recommendation necessarily to buy the stock right now, but you should definitely take a look at it.

Newmont is a leader in gold. In technology, a company that has fallen on hard times, but that I feel is set for fresh growth is Microsoft, which you can read about in Microsoft May Be Set for Prime Time.

The Place You Need to Have Capital in 2012

The market chaos continues to grip the stock markets. We have the European debt crisis and a concerted effort to fix it, albeit it will be extremely difficult and take years.

Also Read The Stock Market Corrected; Guess Which Industry’s Best Poised for Capital Gains?

The European Central Bank (ECB) cut the eurozone’s interest rate by 25 basis points to one percent—the second cut in five weeks. However, keep in mind that the ECB increased rates two times prior to the cuts. The cut will have little impact on the effort to revive the region and avoid another recession given the debt crisis. The ECB should have cut interest rates to below one percent as we did in the U.S. and as the U.K. did. The concern was that inflation in Europe is three percent, so the fear was that lower rates could drive up inflationary pressures.

President Mario Draghi, President of the ECB, admitted that the eurozone may be set for a mild recession. If so, a 25-basis-point rate cut is not exactly a remedy. In addition, there appears to be no plans for a fund for bond buying after speculation on Wednesday that the G20 was looking at a $600-billion International Monetary Fund lending program in the eurozone.

The problem remains the possible S&P credit cuts in the eurozone and the muted economic renewal. I still consider the market risk to be quite high.

Also keep a close watch on China. The country’s economy is stalling as exports for cheap Chinese goods decline due to lower demand from Europe and the U.S. Gross domestic product (GDP) could plummet to 6.8% in 2012 from 9.1% if Europe and the U.S. falter, according to the Asian Development Bank. This is a valid concern that is causing some stir amongst traders.

And don’t forget the crippling U.S. debt levels and U.S. deficits. The powerful U.S. economic engine continues to show breaks and is stalling at this most critical time.

With all of this uncertainty that I feel could worsen as we head into 2012, gold continues to be the place you need to have capital.

The December Gold is edging higher at above $1,740 and its 50-day moving average (MA) of $1,700. The golden cross on the chart remains, with the 50-day MA above the 200-day MA of $1,606.

Michael Purves, gold bull and chief market strategist at BGC Partners, believes that gold could trade at $2,000 an ounce by March 2012.

Lombardi Financial initially turned bullish in 2002-2003 and has remained so ever since. Although at times the bullion has had a rough ride, prices have turned around significantly after first breaking above $400.00 and we believe the spot price of gold will take a run at $2,000 by 2012 should the global economies and risk continue.

The simple truth is that gold is a trustworthy and realistic investment instrument that should be in every investor’s portfolio. Gold’s traditional role as a safe haven has made it the underdog in the world markets. It is an investment that people turn to only when stock or bond markets aren’t performing well, or when monetary policies are running amok. Yet, there is a sense that gold may be increasingly seen as a credible and realistic investment vehicle and not just as a safe haven instrument to park capital.

Also Read Answered: Can I Still Make Money Buying Gold Now?

In the current climate, gold represents the best bet, while silver continues to be a trading commodity based on the economic recovery and demand for electronics and industrial applications.

My advice to you is to buy a mixture of exploration-stage miners along with small to large producers. Under this scenario, you can play both the potential aggressive gains of exploration stocks and the steady returns of the large producers.

One of my top areas at this time is the junior miners, which you can read about in Mining for Riches: Great Metals Stocks to Check Out. See what companies I like.

If you want to know what I think is one of the top gold plays available, read Newmont: A Class Act in Gold.

Also Read Gold Investments

The Stock Market Corrected; Guess Which Industry’s Best Poised for Capital Gains?

The spot price of gold has been in correction for the last couple of months. Gold stocks have also been correcting and I think the stock market is setting up the sector for a strong advance in the first half of 2012. The fundamentals for gold and gold stocksjust keep getting better and, now that central banks are coordinating even more liquidity to capital markets, the easy money will help boost global inflation rates.

According to Eurostat, which is the eurozone’s main statistics agency, the current inflation rate in the 17 countries that use the euro currency is running at three percent, while most of these economies are producing little to no growth. Unemployment in the eurozone was 10.2% in September and 10.3% in October and interest rates are falling. It’s the perfect brew for rising inflation.

In a report written by Thomas Biesheuvel at Bloomberg, gold stocks are said to be now trading at their cheapest valuation in the last nine years, even though the spot price of gold is trading close to its historic high. Everything in the stock market has been correcting in price and there’s a lot of good value out there, but no industry is poised for the same rate of earnings growth as gold.

The stock market experienced a price correction due to the European debt crisis and that brought gold stocks down commensurately. But, instead of snapping up reasonably priced gold stocks, gold investors have been buying gold exchange traded funds (ETFs) instead. According to Bloomberg and the Commodity Futures Trading Commission, holdings in gold ETFs grew to a record 2,350.8 metric tons, worth $127.6 billion as of last week. Hedge funds and other institutional speculators have been increasing their net-long position in gold over the last four weeks straight, which is the longest stretch since March. See Stock Market Correction Phase Over? Spot Price of Gold Looks to Be Bottoming.

So, we have positive, developing fundamentals for gold and gold stocks that are undervalued and poised to report record financial results in the fourth quarter. Now is the time to be considering new positions in gold stocks (if you haven’t already), perhaps more so than an ETF that moves with the spot price. Regardless, it’s pretty clear that the stock market has underappreciated the financial performance of most larger-cap gold stocks over the last several months.

The stock market’s latest correction was fostered by the European debt crisis, but what transpired was a severe reduction of confidence—in the prospect for global growth and the ability of eurozone policymakers to deal with the problem. Accordingly, stock market investors have been extremely reluctant to speculate in gold stocks, which I admit is a stock market sector that tends to be highly volatile and unpredictable. If the debt crisis in Europe can be contained, at least for the next few quarters, then I think gold stocks are extremely well positioned for capital gains. Valuations are reasonable and earnings expectations are strong. Investment risk still remains very high in the stock market at this time, but there are very few industries with fundamentals as strong as gold and precious metals.