Many investors dumped their gold and gold stocks after Fed Chief Ben Bernanke signaled that there were no immediate plans for additional stimulus this week. Gold related assets- which were already weak- plunged in response and the dollar rose, as some investors began to believe that money printing would come to a screeching halt this year.
However, just a couple days later, the March jobs report came in way below expectations, with just about 120,000 jobs being added, instead of the 200,000 plus that were estimated. This data raised new hopes that the Federal Reserve will have to start a new quantitative easing program in 2012, because the theory that the economy is strong enough to gather steam on its own is suddenly questionable. It seems that investors who liquidated their gold positions might regret it soon. Aside from the weak jobs report, a number of factors are poised to come together in late 2012, that could lead to a surge in gold from current levels:
- Gold has sold off on the belief that the economy is improving and that systemic risk from Greece is now off the table. However, those beliefs appear premature. The debt crisis is far from resolved in Europe and bond yields in Spain, Portugal and even France are starting to tick up after a recent period of stability. Investors want gold because they cannot or will not trust banks and other financial institutions. Gold is transportable and it is an exchangeable form of currency that can't be printed by central banks. Debt crisis and systemic risk concerns are likely to resurface in the coming months, and that could lead to more demand for gold. Furthermore, the debt issue in the U.S. could turn into a crisis later in 2012 or 2013, when the debt ceiling debate is revived. It's possible that at some point investors will no longer rush into Treasury bonds, and instead go for gold.
The economy is not on stable footing yet. While there has been plenty of solid data points in the past few months, much of this is due to unsustainable and artificial stimulus which is likely to dry up right around election day. Investors have little to look forward to after the election as taxes are due to rise substantially with Obama's 2013 budget. The combination of the end of election year stimulus, plus rising taxes and debt concerns all over the world, could allow gold to regain a "safe haven" status.
The tensions with Iran over their nuclear program could also lead to stronger gold prices. Iran seems to be simply trying to run out the clock as politicians continue with more false diplomacy hopes. Israel might get tired of kicking the can down the road and if the situation develops in an unfortunate way, gold is likely to see stronger demand.
With all the challenges the global and U.S. economy faces, it's almost crazy to think that the U.S. economy is in a position to sustain itself for solid growth. The March jobs report is evidence of that, and if the Fed pulls back now, you can just imagine what the September jobs report might look like. Those that believe the U.S. economy is on solid footing and that it can grow even as Europe and China slow down, are likely to be in for a rude awakening. Europe and the U.S. need the printing presses to continue, and that means the uptrend in gold will continue.
After a major correction in most gold stocks, here are a few bargains to consider now:
Market Vectors Junior Gold Miners ETF (GDXJ) is an exchange traded fund that invests primarily in junior gold mining stocks. This could be one of the best ways to play a rebound, and do it with less risk. Since this fund holds many stocks in the portfolio, it reduces the risk for investors due to diversification. This fund is deeply oversold and appears to offer real value at current levels. It trades just pennies away from a 52-week low and for nearly half of the 52-week high. It also offers a generous dividend yield of nearly 4%.
Here are some key points for GDXJ:
Current share price: $22.47
The 52 week range is $22.39 to $42.50
Earnings estimates for 2012: n/a
Earnings estimates for 2013: n/a
Iamgold Corporation (IAG) shares have endured a very harsh sell-off without good cause. This great company has been caught in the downward momentum and negativity that exists for gold miners today. That gives investors a chance to buy this gold exploration and mining company for very cheap. Iamgold has many upside catalysts, with five gold mines in North America, South America and Africa. This company has a rock-solid balance sheet with no long-term debt and just over $1 billion in cash. That kind of cash puts Iamgold in a position of strength and it makes the stock lower risk when compared to highly leveraged gold companies. This stock pays a 25 cents per share dividend, which yields 2.2%. With the shares trading for about half the 52-week high, now is a great time to pick up this solid company while the stock is still weak.
Here are some key points for IAG:
Current share price: $16.24
The 52 week range is $14.69 to $23.88
Earnings estimates for 2012: $1.34 per share
Earnings estimates for 2013: $1.62 per share
Newmont Mining Corporation (NEM) is one of the largest gold companies in the world and it has mining operations in the United States, Australia, Peru, Canada, New Zealand, and other countries. After a big drop in gold and mining stocks, Newmont shares look downright cheap. The stock offers an above-average dividend of $1.40, which provides a yield of 2.9%. These shares also appear undervalued when you consider that the company now trades for less than 10 times earnings. Furthermore, Newmont has a strong balance sheet with about $1.85 billion in cash. The balance sheet strength and the generous dividend yield are likely to help support the stock at these levels. Due to all these positive factors, Newmont is a relatively lower-risk way to invest in a gold stock.
Here are some key points for NEM:
Current share price: $47.73
The 52 week range is $47.47 to $72.42
Earnings estimates for 2012: $4.93 per share
Earnings estimates for 2013: $5.69 per share
Yamana Gold, Inc. (AUY) is another good way to play a rebound in the gold miners. Yamana has several producing mines located in Brazil, Chile, Argentina, Mexico, and Colombia. It also has three mines in development which could add to the growth potential in the future. Yamana pays a 22 cents per share dividend, which yields 1.5%. The price to earnings ratio is reasonable at about 12 times earnings.
Yamana also has a solid balance sheet, however, between Yamana and Iamgold, I prefer shares of Iamgold, because they pay a higher dividend, it also has a lower price to earnings ratio, and a cash-rich balance sheet with no long-term debt. For now, I would watch Yamana shares and consider buying on further dips.
Here are some key points for AUY:
Current share price: $14.82
The 52 week range is $11.10 to $18.16
Earnings estimates for 2012: $1.18 per share
Earnings estimates for 2013: $1.55 per share
Freeport-McMoRan Copper and Gold (FCX) explores for and produces precious metals like gold and silver, plus other resources such as copper, cobalt, etc. Freeport has a strong balance sheet with around $4.8 billion in cash and around $3.5 billion in debt. With about $21 billion in annual revenues, Freeport has the scale to continually be a low cost producer with copper and gold production, and it will benefit from the rebound in both metals. Thanks to the major correction in gold stocks, these shares now trade well below the 52-week high of $58.75 per share. The price to earnings ratio is now around 7 times forward earnings and investors are paid an above-average yield of 3.3% to wait for a rebound in the share price.
Here are some key points for FCX:
Current share price: $37.80
The 52 week range is $28.85 to $57.60
Earnings estimates for 2012: $4.16 per share
Earnings estimates for 2013: $5.37 per share
Annual dividend: $1.25 per share which yields 3.3%
Disclaimer: Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I am long IAG.