How to Profit from the Gold Frenzy


These days, we all want to be like King Midas.  And hey, why shouldn’t we?  The price of gold smashed through its previous record high in early October, and the value of the precious metal now is firmly above $1,000 an ounce.  Traders and speculators love gold for its liquidity, volatility and price appreciation.  Investors motivated by fear of a collapsing U.S. dollar love gold as a hedge against inflation. In fact, with gold trading at such a high level, even rich folks love gold for its trade-in value.

I recently read an article on the Bloomberg web site that told the story of a company called Cash for Gold (not to be confused with the company Cash4Gold, which runs TV ads offering to buy your old gold jewelry).  Cash for Gold recently set up temporary shop in the ritzy community of Greenwich, Connecticut, which also happens to be the nation’s hedge-fund capitol.  Operating out of the Hyatt Regency hotel off Interstate 95, the company collected nearly $100,000 in gold in just four days from the affluent Greenwich set.

So, what’s the best way to profit from this golden frenzy?  Should you buy gold coins? What about gold bullion exchange-traded funds (ETFs) or gold mutual funds?  Should you go into your jewelry box, take a drive on Interstate 95 and visit the Cash for Gold guys?  I think not.  As long as gold prices remain at lofty levels, I say the best way to play gold is via gold mining stocks.

On Thursday, two of the world’s largest gold mining companies, Barrick Gold Corp. (ABX), and Newmont Mining Corp. (NEM) fueled the gold frenzy further by posting better-than-expected quarterly profits.  Both companies also forecast increased gold production in 2010.

In Barrick’s case, the company’s third-quarter came in at an adjusted 54 cents a share, which easily soared past consensus forecasts for EPS of 46 cents.  More importantly, Barrick reiterated its full-year 2009 gold production forecast of 7.2 million to 7.6 million ounces, at total cash costs of $450 to $475 per ounce.  With the cost of production less-than half of the current price of gold, you can see why Barrick is the real way to turn yourself into King Midas.

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Newmont Mining enjoyed similar results in Q3, with profit doubling in the quarter. The company said net earnings came in at $388 million, or 79 cents per share, compared with $191 million, or 42 cents per share, a year earlier. Revenue also surged, climbing 50% to $2.05 billion.  The Street was anticipating earnings of just 55 cents per share, and revenue of $1.72 billion.

Like Barrick, Newmont also gave a shiny forecast for 2010, saying gold production should improve by about 5% to 10% in the year ahead, primarily due to higher production out of new mines in Australia and Indonesia.
Certainly, Barrick and Newmont are two outstanding gold mining stocks.  Other great miners are AngloGold Ashanti (AU), Goldcorp Inc. (GG) and Kinross Gold Corp. (KGC).  Together, these five stocks comprise the top five holdings in the Market Vectors Gold Miners (GDX), an ETF seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the AMEX Gold Miners index.

Now, if you’ve been long gold mining stocks for the past year, you’re sitting on a gain of more than 125%.  And while this ETF has had its share of volatility midst this amazing run, I think it is volatility well worth stomaching for the kind of upside potential you get from the gold mining sector.

If you’ve been waiting to jump on the golden bandwagon for a while now, but still aren’t sure what the best way to do it is, then maybe it’s time to consider companies that actually extract the precious metal from the ground. They might just be the goose that keeps on laying the golden egg for years to come.

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