Gold Investors: Stay Nervous

Includes: GFI, NEM, NG, SA
by: Toby Shute

In recent weeks, we've seen some of the Fool's best and brightest take potshots at gold. My former editor Joe Magyer told you that dividend-paying stocks are way better, and Amanda Kish suggested that we're in the early stages of a bubble.

I, too, am more than a little concerned about investors' growing enthusiasm for the yellow metal. I bring a pretty different perspective from my peers, however, being that a Canadian-listed gold exploration outfit is the biggest position in my highly concentrated stock portfolio. Any gold skepticism on my part is hardly a case of sour grapes.

Let me explain why I'm not tickled by each $10 uptick.

$2,000 gold is for chumps
As discussed in my search for America's next top gold mine, Fronteer Development Group (AMEX: FRG) and its joint venture partner (the one I own) have what looks like a very attractive gold project at Long Canyon, in northeastern Nevada. The preliminary project economics are extremely robust, even at $700 gold.

With a cost profile like that, I have relatively little to gain from the $1,350 gold that Goldman Sachs (NYSE: GS) sees coming next year, let alone the $2,000 gold that my Foolish friend Chris Barker, among many others, expects sometime before this monster move is over.

Don't get me wrong: A run to $2,000 per ounce would be great for the Long Canyon project's bottom line, were the mine to start up in time to fetch such prices. But such an extreme price move would disproportionately benefit previously marginal mines, and no doubt push some seriously cumbersome projects into the development pipeline. Think NovaGold's (AMEX: NG) Donlin Creek joint venture with Barrick Gold (NYSE: ABX) in Alaska, or Seabridge Gold's (AMEX: SA) KSM project in British Columbia, should someone like Newmont Gold (NYSE: NEM) or Gold Fields (NYSE: GFI) decide to take that one on.

$2,000 gold would shake the fleas off of any dog of a gold project. So many new mines would get built that the current talk of "peak gold" would look downright laughable. (Then again, in a $2,000-gold world, we might not have functioning capital markets to finance these projects.) Some really dubious outfits (see my CAPS profile for some stinkers) are attracting crazy valuations at $1,000 gold. Imagine the madness at twice the price.

My advice for Fools interested in retaining precious metals exposure is to stick to proven, shareholder-friendly management teams advancing top-shelf projects in pro-mining jurisdictions. And stay nervous.

Author's Disclosure: No positions in any company mentioned, but I do own shares of Fronteer's joint venture partner at Long Canyon.