Monday, August 27th, 2012
By Mitchell Clark, B.Comm. for Profit Confidential
The price of gold is going up, and it just crossed $1,660 an ounce. Silver crossed $30.00 an ounce. You might say that precious metals are back. You can plainly see the resurgence in gold stocks, which have really turned around from what was a considerable period of weakness. The majority of gold stocks have been trending lower all year, as the spot price has been consolidating.
Expectations for more monetary stimulus from the Federal Reserve are contributing to a weaker U.S. dollar, which is helping precious metals (and oil prices) move higher. If the Federal Reserve takes additional action at its next Federal Open Market Committee (FOMC) meeting in September, then the recent strength in gold prices should carry right into 2013. (See “Federal Reserve: Will It Act Soon to Jump Start the Economy?”) Regardless, I wouldn’t be without some exposure to gold over the near term; I think we have the makings of a new upward trend in gold prices.
Across the board, mining companies have had a tough year on the stock market. It’s as if institutional investors just abandoned the entire group. Even large-cap dividend-paying heavyweights in the gold sector have been under a lot of pressure. And the funny thing is that the spot price of gold really hasn’t corrected all that much from its record high. As is usually the case, gold investors join the bandwagon late and leave it very quickly.
Newmont Mining Corporation (NYSE/NEM) has been struggling all year. The stock was trading at $60.00 a share at the beginning of the year and hit a low of $42.95. In my view, the correction in gold prices produced an excessive correction in gold mining stocks, thereby creating value within the sector. At its current price of $50.00 a share, Newmont has recovered significantly from its recent low, and the company still boasts a dividend yield of three percent.
Chart courtesy of www.StockCharts.com.
More and more investment banks are predicting gold prices will reach $2,000 in 2013, but I’m not sure whether that’s a good thing or not. I always prefer to see a price action take place, and the big investment banks coming on board after the major move. But the fundamentals are right for gold prices to accelerate, considering all the events that are taking place now and those that are on the horizon. Gold prices are going up now, however, because of the weakening U.S. dollar. The U.S. dollar is going down because of the hope for a third round of quantitative easing (QE3) or some similar monetary stimulus policy.
If the U.S. economy experiences another recession in 2013, the fundamentals for gold prices remain solid. If the U.S. economy continues with its recovery, the fundamentals for gold prices get even better. Regardless, in the age of austerity, rising money supplies, and ballooning sovereign debt, the outlook for rising gold prices is solid.
|Total 2012 per share earnings for 30 stocks in the Dow Jones Industrial Average:||$900|
|Dow Jones Industrial Average Price/earnings multiple:||16.0|
|Dow Jones Industrial Average Dividend Yield:||2.5%|
|10-year U.S. Treasury Yield:||2.02%|
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