Quick, if you could buy a single asset to protect your wealth for the next decade, what would that be?
If you are like a lot of investors, the first word that popped into you head was probably “gold.” And with good reason: The media has focused heavily on gold in recent months. The gold bugs have had center stage since the financial crisis began in earnest in 2009.
The reasoning is simple. The Federal Reserve’s cure for what ails the economy has been to print literally trillions of new dollars and use a big chunk of that to buy U.S. Treasury debt on the open market. That and a zero benchmark rate have kept money cheap for an extraordinarily long time.
The immediate effect has been undeniably salutary. The Fed’s aim was to convince consumers and investors that the end of the world has been postponed, and it likely has. Not canceled, mind you, but absolutely postponed.
The next few years will be tricky, to say the least. Fed Chief Ben Bernanke faces a public mutiny from hawkish members of the Fed’s all-important rate-setting committee. Or, charitably, they are engaging in a particularly acrid from of “jawboning” rates higher ahead of action. Members have given several speeches recently that bluntly warned of the rising inflation risk.
"The U.S. economy is afflicted with the pathology of structural deficits. This leaves the nation poorly positioned to weather the next recession or shock to come our way," Dallas Fed President Richard Fisher said in a recent speech. "I devoutly hope our next downturn won’t come for quite some time, but it surely will come eventually."
Meanwhile, Washington faces a serious dilemma on spending. Enormous cuts — really, austerity in the European sense — are the clear solution, but nobody on either side of the aisle is really ready to jump on that particular grenade.
If you buy the argument for gold, all these factors in concert mean there is just no exit. Gold must rise as the Fed’s easy money inevitably finds its way into the economy. If the Fed acts, it will be too late, as usual, say gold’s proponents. Gold calls of $5,000 or higher are commonplace.
“The U.S. dollar continues under acute pressure, as the world seeks an alternative reserve currency. The days and years of manipulation, fraud and criminal behavior are fast coming to an end,” writes Bob Chapman, editor of The International Forecaster newsletter, in a recent commentary.
“New alliances are evolving, as are outspoken advocates of a new world reserve currency. As a result, more and more foreigners are bypassing Treasury and agency bonds, as well as other U.S.-dollar denominated investments. We watch as other major nations accumulate gold and cannot help but think that the new world reserve currency will be gold-backed.”
You could take that bet on the metal, and certainly some famous hedge fund names (among them George Soros and John Paulson) have done so via exchange-traded funds such as iShares SPDR Gold Trust (GLD).
But market experts also like gold mining stocks. The reasoning is this: Gold stocks tend to rise with the metal but do so in a leveraged way. As the price of the metal goes up, the earnings power of a company sitting on reserves goes even higher. Those fast-rising earnings usually bring in droves of stock buyers.
But which stocks? Given the potential rise in gold, it would seem all boats are set to rise, so there’s likely no reason to stick your neck out on tiny, unproven junior mining companies. Here are three big, highly liquid gold mining stocks to consider:
Barrick Gold (ABX) is a geographically diversified global mining giant with operations in North America, South America, Australia, areas of the Pacific, and Africa. Based in Toronto, the company also has interests in copper and petroleum projects. It produced 7.7 million ounces of gold in 2010 at a cash cost of $457 an ounce. It claims the largest reserves in the metals mining industry, totaling 140 million ounces of gold, 6.5 billion pounds of copper, and 1.07 billion ounces of silver. It pays a 48-cent annual dividend.
Kinross Gold (KGC), also a Canadian miner, is focused on gold and silver (often found with gold and separately processed) in mines in which it owns either control of or significant interest in the United States, the Russian Federation, Brazil, Chile, Mauritania, and Ghana. At the end of 2010, the company produced and sold 2.5 million ounces at a cash cost of $495 per ounce. It held gold reserves of 62.4 million ounces, silver reserves of nearly 91 million ounces, and copper reserves of 1.4 billion pounds. It has an annual dividend of 10 cents per share.
Newmont Mining (NEM) is based in Colorado but mines globally, including in South America, Asia Pacific, and Africa. It produced 6.4 million ounces of gold in 2010 at a cost of $485 per ounce. It reports gold reserves of 93.5 million ounces and 9.4 billion pounds of copper. It sports an annual dividend of 60 cents per share.
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