Gold. It’s the talk of the town right now — and for good reason. Since last Friday, the precious yellow has plunged more than $140 an ounce, or about 8%. What’s Midas trying to tell us?
Gold haters will no doubt say, “It’s just another bubble bursting. Good riddance.” But I wouldn’t be so quick to draw that conclusion.
Yes, the price of gold has climbed much faster than other goods and services over the past 10 years and certainly could be viewed as expensive now. However, the recklessness of the world’s fiscal and monetary authorities over the same period is also unprecedented. Thus, it’s reasonable to suppose that gold’s value as “insurance” (against further mismanagement by policymakers) has increased exponentially.
Why, then, has bullion plummeted in recent days? Some of the selling might trace back to technical causes: profit-taking by John Paulson and other hedgies, stop-loss orders previously entered by short-term traders, etc.
I suspect, though, that another factor is probably at work.
We know European banks are under heavy pressure to raise cash. Nobody wants to lend them money, other than the ECB, the Fed and a few other government institutions. Quite possibly, the banks are seeking to relieve the crunch, in part, by liquidating gold through direct and indirect means.
If my hunch is correct, the selling spree in gold should abate during the next few weeks. Meanwhile, a number of mining stocks are beginning to look extremely undervalued.
In addition to Barrick Gold (NYSE:ABX), a long-time favorite, I’m warming up to Newmont Mining (NYSE:NEM). From about 5 million ounces in 2011, management expects to boost its annual gold production to 7 million ounces by 2017 — making NEM a genuine growth enterprise.
What’s more, Newmont estimates average cash costs of $575 an ounce for its new projects. So this outfit will continue to mint money even if the price of gold falls back several hundred dollars from here.
Most attractive about NEM is management’s shareholder-friendly dividend policy. In September, the company announced it will link the quarterly dividend to the price of gold. From a base of 10 cents per share at a bullion price between $1,100 and $1,199, the dividend scales up five cents per share for every $100 increase in gold. Thus, if the Midas metal remains between $1,500 and $1,599 (the current range), NEM will pay 30 cents per share quarterly.
At yesterday’s closing price of $61.76, that works out to a yield of about 1.9%.
