Guns And Gold: The Trading Strategy For Our Times

 |  Includes: ABX, EGO, GDX, GG, GLD, IAU, NEM, SWHC
by: The Wall Street Transcript

“Guns and Gold” has become widely accepted as a wise trading strategy during the current high-volatility markets. Recent interviews with a top Goldman Sachs (NYSE:GS) gold analyst and the CEO of the Smith & Wesson Holding Corporation (NASDAQ:SWHC) document the growth of this new investment strategy.

Analyst Ian M. Preston follows gold and resources for Goldman Sachs, and he observes that gold producers are raising their dividends to attract investors back from gold ETFs like the iShares Gold Trust (NYSEARCA:IAU), the SPDR Gold Shares (NYSEARCA:GLD) or the Market Vectors Gold Miners ETF (NYSEARCA:GDX), making their ROE stronger as gold prices are expected to scratch the $1,900 mark in 2012.

"The competition for major gold companies is not between themselves. They have to give a bit of return than what you can achieve just simply having gold in an ETF," Preston said in an interview published December 6.

"You’ve got to be able to not only grow earnings in an improving gold price, but in our view you’ve also got to give a return to investors."

Preston says Newmont Mining Corp. (NYSE:NEM) has already implemented a dividend linked to gold's rapid price increases. He also says other major producers are raising their dividends significantly, aiming to provide investors with 2.5% to 3% levels of yield.

"[Newmont Mining has] linked the dividend to where the prevailing gold prices — I mean, I think that’s a clear signal that they want to make it very easy, very transparent for an investor," Preston said. "And the share price response for Newmont post that announcement has actually been very positive."

Other precious metal mining stocks mentioned in this interview include the Barrick Gold Corporation (NYSE:ABX), Eldorado Gold (NYSE:EGO), Goldcorp (NYSE:GG) and Newmont Mining (NEM) traded in the U.S.

The report also includes Kingsgate Consolidated (KCN.AX), Newcrest Mining (NCM.AX), Perseus Mining (PRU.AX) and St.Barbara Limited (SBM.AX), which are traded in Australia, and Toronto Stock Exchange companies Teranga Gold (TGZ.TO) and Alacer Gold (ASR.TO).

Gun consumption is not far behind the growth rate of the price of gold. P. James Debney, the CEO of Smith & Wesson (SWHC), notes that data from the National Instant Criminal Background Check System, or NICS, shows strong year-over-year growth, indicating Americans are buying more firearms than ever before.

Further, NICS data for background checks reached record highs in November 2011, and is 18% greater than 12 months before, according to the latest data available on the Federal Bureau of Investigation’s website.

“If you take the primary indicator, which is NICS, the background checks performed through the FBI when a consumer purchases a firearm, that number has had very strong year-over-year growth that has continued even after the surge period that occurred in late 2008 and into 2009, reflecting strong growth in the firearms industry,” Debney said. “Couple that with trends toward concealed carry, which we believe are driven by the need for self-protection in the current environment, where municipalities have fewer funds available to support the current need. We believe the result is that people are generally taking responsibility for protecting themselves.”

These interviews suggest a profitable investment strategy for 2011. As gold coins and ammunition become the popular stocking stuffers this December, the “Guns and Gold” investment portfolio may become the trade of the year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.