So what's the truth about gold? Where is the market heading and what's the move for investors?
The simple answer is: gold is like any other investment - it has its pros and cons, and there are moves into and away from gold recently made by the 'big names'.
In the short run, gold can be a safe haven in a time of uncertainty. With several events in recent months and years relating to political and economic volatility, our markets (and the world in general) seem increasingly hard-wired to experience these periodic waves of crisis and calm. While the Fed is desperately trying to stimulate the economy, and housing prices remain slow on the rebound, one sees the continued issues with the Middle East being far from stable in recent weeks. Stability in the political/economic climate appears to be more and more fleeting. In this sense, gold can be seen as a short-term hedge, or a short-term speculative play on volatility.
That being said, investors also have some downside with gold. One may pay a markup for buying gold, and the cost of buying a security should be factored into any investment decision. Another grumble is that some ways of buying gold come with extra risks such as those with gold-mining shares, which are definitely more volatile and can be correlated with the stock market especially in sharp declines. With these thoughts, let's look at a few possible choices for investors that will achieve the return they seek.GLD and GDXJ
I sometimes like to take the strategy of cheating off the smartest guys in the room. George Soros is a big name at the investment strategist table. The billionaire hedge fund manager reported last month that he had almost $240 million in gold-related positions. Moreover, on May 16 he had purchased $25M in call options on the Market Vectors Junior Gold Miners ETF (NYSEARCA:GDXJ).
The historical relationship between gold and gold shares shows the logic behind the move, but why would Soros buy gold-related instruments and not equities, even the large caps? In the case of GDXJ, he (or any other investor) would actually be buying a "basket" of equities related to gold/silver mining and exploration. By doing this, one could spread the risk over several companies in the same space. This diversification could protect from a one-off event such as politics or natural disasters that could undermine a correct call on the sector as a whole.
In addition, as previously stated, exposure to gold carries some cost with it. Popular vehicles such as GLD charge reasonable prices for exposure to gold.Pilot Gold (PLGTF)
Pilot Gold has been called a 'must-own' stock due to its conservative yet progressive strategy. After selling Fronteer Gold to Newmont Mining (NYSE:NEM) for $2.3 billion, Pilot launched a spin-off, joint venture with Teck Resources (TCK) in a pair of important gold-bearing properties in Turkey. This smacks of a 'that's-good-that's-bad' scenario due to what is currently happening politically in Turkey.
Even so, the Haligaga project boasts an encouraging assessment, with a net present value of over $470 million and an internal rate of return of 20%. Accordingly, Pilot's current market capitalization of $175 million stands at a discount to the estimated value of the company's 40% share of Haligaga alone.
During the second half of 2013, Pilot intends to conduct a 25,000-meter exploration campaign at the company's 100%-owned, past-producing Kinsley asset in Nevada. Initial drill results show promise there as well, placing another 'golden nugget' in the investment prospect. Currently, the stock is $.89 and, in my opinion, a $3 share price can be reasonably expected.Pershing Gold & Silver (NASDAQ:PGLC)
Pershing Gold is another promising opportunity, though it should be said, not without risk of course. According to Forbes, if Pershing Gold can continue drilling as they have in the past 12 months for the next 12 months, it is reasonably expected that they could be pushing close to 1,250,000 oz, getting ready to commence production in 2014. As they get closer to production, the value of the resources on the balance sheet should increase as well.
The current $100mm market cap implies $200/oz for an anticipated 500,000 oz. If the new resource report shows a number closer to the firm's expectations of 650-750,000 oz, the stock price should rise a bit. Currently at only $.37 per share, some anticipate a bump to around $.50+.
It should be noted here, that this is a younger and smaller company compared to others mentioned here. They simply don't have the time in the industry, nor the established streams of production. Much of the growth estimation is based on the prospective land results.Sabina Gold & Silver (OTCPK:SGSVF)
Sabina seems to be the secret success in the gold market. With a current market cap of just $390 million, these shares presently value the entirety of Sabina's non-cash assets at an impressive $261 million.
According to reports, Sabina is due 22.5% of the first 190 million ounces of silver produced from XSTRATA's Hackett River polymetallic property, and 12.5% of any silver output thereafter. Using a conservative silver price of $22 per ounce, Sabina makes a convincing case for a $650 million net present value for that silver royalty alone.
Now, let's talk gold. Sabina's Back River property boasts an uncommonly high average gold grade of 5.6 grams per ton across an indicated resource of 4.2 million gold ounces, plus another 1.7 million ounces in the inferred category. The company is also eyeing a prospective land package in addition to year over year extending mineralization 'to depth and along strike' (gold speak for capitalizing on what is already producing), all the while adding ounces and finding new targets that warrant follow-up. The current stock price is $.92 with next major catalyst for a bump being the Back River study results due in late Q3. Based on findings, this could easily achieve up to a dollar increase.Summary
In the long term, gold is a good way to invest in expectation of higher inflation growing possibility. As governments battle debt problems and central banks intervene on their behalf, we could very well see deliberate weakening of currencies in many developed countries. If central banks start buying gold in earnest, it will create extra demand. Even if central banks simply hold onto their stockpiles of the metal, they will limit supply. Either scenario gives some support to the gold price.
Investors should incorporate it into their portfolios only with an understanding of the risks. I see these companies listed along with other well managed ETF's as true 'golden' opportunities.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.