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I admit it: I hate gold / GLD as an investment. But there is a gold stock I've been buying and I'm excited about it because it plays on several tidal-wave-sized demographic trends. First off, gold is primarily a "fear metal". And it went up to recent highs simply because of the fears that the sovereign debt "contagion" was going to spread to the US. But a trillion dollar bailout and a bunch of wimpy EU stress tests have basically resolved that fear. Nor do I think gold is a hedge against inflation. The correlation between gold and CPI in the past 50 years has been a measly 0.14. Meaning, there's no correlation at all. So why like a gold stock? First off, it's not a mining stock like Newmont Mining (NYSE:NEM), NovaGold Resources (NYSEMKT:NG), or Barrick Gold (NYSE:ABX), all three of which do well when gold goes up but not as well when it goes down. I want a stock that will do well in either environment.
One of the biggest demographic trends that will be occurring over the next ten years is the rising middle class in China. The Chinese middle class is growing by approximately 50mm people a year and represents 25% of the population now, up from less than 5% of the population a decade ago. That means, for instance, that China has gone from being the 20th country ranked by oil consumption to the 2nd country and is now number one in terms of total energy consumption. It also means the demand for luxuries by this nouveau middle class is now insatiable, growing, and cannot easily be satisfied due to lack of supply. Catering to this middle class are companies like Baidu (NASDAQ:BIDU), Sohu.com (NASDAQ:SOHU), Ctrip.com International (NASDAQ:CTRP), but these companies have had their run.
Kingold (NASDAQ:KGJI), the leading designer and manufacturer of 24 karat gold jewelry in China has all the characteristics I look for in a potential ten-bagger:
  • Strong growth: 2008 revenue was $110mm, 2009 revenue: $250mm, and 2010 revenue will probably come in greater than $500mm.
  • Strong earnings growth: 2008 earnings were approximatey $6mm. 2009 earnings were approximately $9mm. Q1 2010 was $4mm and I expect 2010 earnings to be between $20-25mm.
  • Low multiple - the company trades for approximately 9 times my projected 2010 earnings. As opposed to a company like Tiffany (NYSE:TIF) at 17x with much slower growth.
  • Large market: the total jewelry market in China is approximately $20bb in 2010, up from $16bb in 2009 and $10bb in 2003. Between 1993 and 2008 the jewelry market has grown by 400%.
  • Large market, part 2: jewelry is the third largest consumption item in China after autos and housing.
  • Kingold manages the risk in fluctuations in the price of gold by using just-in-time inventory controls, minimizing the time between a purchase order, the purchase of gold, and delivery of the final product to under five days according to their filings. I'm not a believer in market timing gold. In fact, I'd rather own a growing company with growing earnings and revenues than a piece of rock. But I am a believer in the luxury industry, which is already fully matured (perhaps too matured) in the US but only at the beginning stages in China. Kingold also keeps down their costs by directly buying the gold from the Shanghai Gold Exchange, where they are a member.
  • They are not local but distribute to 15 different provinces within China according to their recent SEC filings.

Despite this, they have about 4.3% market share. With continued growth and consolidation in the industry they can grow their market share inside a growing market.

The best hedge against inflation is not a rock like gold, but a company that benefits from the growing globalization that reflation triggers as well as the enormously increasing Chinese middle class.


Disclosure: Will go long KGJI.OB today after article published

Source: The Only Gold Stock I'm Buying