1/4/2012 12:03 PM ET|
Best and worst gold bets for 2012
Fundamentals appear in place for gold to resume its rally. If it does, shares of some -- but not all -- miners could be swept up in the move.
Gold had a banner year in 2011, despite losing about 20% of its value in a late-year correction. And the underlying fundamentals point to another strong year for the precious metal.
Prices should be pushed higher by extraordinarily loose monetary policies in so-called advanced economies, as well as by the beginning of anti-cyclical easing and stimulus cycles in emerging economies. Rising central bank demand for the physical metal, particularly from China, should contribute to the bullishness.
A resumption of gold's upward march would energize shares of gold miners, among the worst performers of 2011.
There is no doubt that gold was a market protagonist last year. From the beginning of the year, gold prices went on an exponential jump, regularly hitting nominal highs as the yellow metal surged more than 35% to $1,920 an ounce in early September. In just a few weeks, though, gold plummeted more than $350 to near $1,550 an ounce.
Even though prominent traders like Dennis Gartman have warned that gold's bull run looks done, the underlying variables that helped gold ride a decadelong rally are in place to provide support in 2012. If gold rises to $2,075 by the second quarter, as Barclays suggests it will, the late-year correction would represent a buying opportunity.
It is hard to say precisely what is conditioning gold's price behavior. Gold trades inversely to the U.S. dollar about 70% of the time. Earlier this year, the yellow metal seemed to be the negative mirror image of 10-year Treasury yields, while recently it has traded more like a risk asset, moving in tandem with the Dow Jones Industrial Average ($INDU) and the euro. With low interest rates set to prevail across advanced economies, gold continues to benefit from a lower opportunity cost of holding an asset that doesn't generate income.
For those who see gold as an inflation hedge, emerging countries -- which are expected to lead in terms of growth this year -- are embarking on easing cycles to stimulate their slowing economies. Brazil, China and others are moving toward looser monetary policies, expanding their monetary bases and unleashing fiscal stimulus.
They will join the central banks of the United States, the United Kingdom and continental Europe in expanding balance sheets, which Tom Winmill of the Midas Funds estimates have grown by $6 trillion since the inception of the Fed's quantitative easing.
The easiest and purest way to gain exposure to gold in your portfolio is through the SPDR Gold Shares (GLD, news) exchange-traded fund, the largest ETF backed by physical gold. The fund tracks the spot price of bullion and provides investors with a highly liquid and hassle-free tool for betting on the precious metal.
Another way to play gold is via equities, but these have substantially underperformed in 2011. The Market Vectors Gold Miners (GDX) exchange-traded fund is down more than 20% vis-à-vis the GLD and has fared worse than the Standard & Poor's 500 Index ($INX) this year.
Hedge fund manager David Einhorn in November said the disparity between miners and metals had grown too big as he shifted some of his GLD holdings into GDX. Joe Foster, the head of Van Eck's actively managed gold funds, said gold miners are all unhedged, fully exposed to the price of gold.
Gold production costs stand at around $800 an ounce, according to Barclays. That means miners are set to make a 98% profit per ounce if the metal is sold at spot prices. This will definitely benefit large-cap miners like Goldcorp (GG, news), Barrick Gold (ABX, news) and Newmont Mining (NEM, news), according to Winmill.
Beyond production costs, investors should look at a miners' projects and relative safety before jumping on board. Winmill warns that several small mining companies, including Primero Mining (PPP, news), carry some big risks. Primero's San Dimas mine, for example, was a castaway from Goldcorp and could pose tax problems, according to Winmill.
Investors in mining companies should also be mindful of companies' overall portfolios, Winmill added. He is wary of Freeport-McMoRan Copper & Gold (FCX, news), for instance, because the company's copper operations are exposed to China's economic cycle.
Gold proved to be volatile in 2011. If the yellow metal continues its decadelong rally, this latest correction will have proven to be a very profitable entry point for bullion. And, if it is indeed time for miners to catch up, as investors like Einhorn and Winmill predict, 2012 will be the time to place one's bets.
VIDEO ON MSN MONEY
to get a good visual of the disparity einhorn mentions, go to GLD and ue a basic chart to compare to the BGEIX miner fund for the past 1, 3, and 5 year periods. we are buying the dips to build share postions in the miner mutuals.
all that glitters ....
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