Cramer's Mad Money - Buy Gold, Not Gold Stocks (7/18/11)

by: Miriam Metzinger

Stocks discussed on the in-depth session of Jim Cramer's Mad Money TV Program, Monday July 18.

SPDR Gold Trust (NYSEARCA:GLD), Agnico Eagle Mines (NYSE:AEM), Barrick Gold (NYSE:ABX), NovaGold (NYSEMKT:NG)

With gold hitting record highs of over $1,600, it is reasonable to ask if it is too late to buy the yellow metal. Cramer says people have been concerned about buying gold for 11 years, and yet in that time, gold has outperformed every other asset class. Some technicians predict that gold could reach $1,700, but Cramer thinks it will go higher.

Gold stocks, however, are a different story, and many have seen significant declines in their stock prices: Agnico Eagle Mines is down 14%, Barrick Gold (ABX) has dropped 7% and NovaGold (NG) has fallen 26% in spite of its significant Canadian assets. The gold companies are suffering because of supply problems, since there either isn't enough gold or they can't seem to get it out of the ground. Gold supply increases at a rate of only 1% per year, and yet demand is still rising. In addition, gold is still underbought. Historically it has represented an average of 5% of portfolios worldwide, and currently it makes up just 1%. With insecurity concerning currencies, gold is like an inflation-resistant currency that can't be debased.

Cramer would stay away from actual gold stocks, but would buy gold bullion, which needs to be stored in a special facility or SPDR Gold Trust (GLD), the ETF which most closely tracks the price of gold.

CEO Interview: Mike Morris, American Electric Power (NYSE:AEP)

American Electric Power (AEP) is the third largest producer of power in the U.S., but the EPA sees the company as an enemy, since it derives two-thirds of its power from coal and uses "dirty coal." AEP has tried to meet with the EPA standards by closing 5 coal plants and designing a clean coal power facility, but lack of funding caused the company to shelve these plans. The company has a 101 year history of raising its dividend, which is now at 4.9% and has an annual earnings growth of 4-8%.

CEO Mike Morris said demand is strong and the company is able to deliver power more cheaply than its competitors. When asked about the conflicts with the EPA over regulations, Morris replied the EPA needs to have a more realistic timeline and not expect the company to implement in 12 months changes that require 48 months to complete. Conservative investors are increasingly flocking to buy AEP, which has steady growth and a solid yield.

More Bad News for Banks; Stock mentioned: Wells Fargo (NYSE:WFC)

With the announcement that President Obama is appointing former Ohio attorney general Richard Cordray to head the Financial Consumer Protection Bureau rather than Elizabeth Warren, many in the financial sector breathed a sign of relief. However, that sigh might be short-lived, since Cordray might prove to be worse for the banks than Warren ever could have been. Elizabeth Warren was on a mission to punish the banks, and her rhetoric was so strong that many felt she was extremist. While Cordray might seem more moderate, that may be only an illusion, since he was an aggressive opponent of banks, and even attacked Wells Fargo (WFC), which was one of the more responsible banks in the sector. Because of the lack of controversy surrounding Cordray, he might prove to be more effective at defending all defaulters and making banks appear rapacious for wanting to collect their due. Cramer thinks the banks could face deep cuts in interest and principal, and the mortgage business will suffer.

Enterprise Products Partners (NYSE:EPD)

In an insecure economic environment, investors are looking for safe investments. Cramer recommended MLPs like Enterprise Products Partners (EPD), a pipeline operator with a generous yield of 5.5%. MLPs have the advantage of not paying corporate income taxes and passing their profits to shareholders. The company generates its revenue from fees and is an integral part of the revolution in domestic oil finds. Oil companies are desperately looking for efficient ways to transport oil from lower cost areas to Louisiana, where they can charge higher prices. The most efficient method of transport is through pipelines, and EPD has formed partnerships to extend pipeline from valuable shales to profitable areas. The company also has an ancillary business in the form of storage for liquified natural gas. While natural gas prices are low, storage has been a major issue, and EPD has 27 billion cubic feet of natural gas storage. Cramer noted the stock is up 14% year over year and should continue to go higher.

IBM (NYSE:IBM), Apple (NASDAQ:AAPL), Halliburton (NYSE:HAL)

Cramer recommended putting on a bear suit for a few days or even weeks, because even though companies are reporting strong quarters, obsession over European woes and the domestic debt crisis is keeping stocks down. Halliburton (HAL) reported a "blowout" number, but the stock barely finished up. Apple (AAPL) and IBM's (IBM) good quarters didn't manage to cheer the mood on The Street. On such a day, investors might have been able to buy good stocks on declines, but the buyers came out of the woodwork and started snapping up momentum names and coal stocks. There wasn't even a chance for investors to get in. Cramer thinks what is needed in this market is capitulation; stocks need to drop before the market can be trusted.


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