Gold bugs are feeling the pain, as precious metals continue with their slower-economic-growth correction. As well, the prospect of action on the Europe debt crisis is tempering the marketplace’s appetite for gold futures. My view is that gold and silver continue to represent some of the most attractive assets going forward over the next several years. We’re in a market where new trends take a long time to develop and we’ll likely see the spot price of gold trade around $1,600 an ounce for quite a while yet.
Of course, gold investments aren’t the only thing an equity investor should have in a portfolio. Gold offers attractive diversification and a store of value in a risky world. At the speculative end, I’d rather own two or three developing junior miners in this environment, over say a technology startup or a drug discovery company. At the speculative end, gold and silver investments make sense. At the blue-chip level, higher-dividend-paying stocks seem to offer better chances of a decent return on investment.
Precious metals are inherently risky assets to own because of their price volatility and sensitivity to the business cycle. Like everything in capital markets, price action tends to occur in major waves and there’s no exception with gold stocks for sure.
During an earnings season, smaller companies typically take longer to report their financial results, because they don’t have large accounting departments. As most mining companies have yet to report third-quarter earnings, it’s highly likely that the third quarter will reveal a blowout quarter on earnings, cash flow, and revenues. Even at $1,600 an ounce for gold, most producing miners are making money hand over fist with this business model. If you take the average miner’s cash cost of around $500.00 an ounce, you can see the attractiveness of the enterprise pretty quickly.
Right now, the spot price of gold is being somewhat hampered by strength in the U.S. dollar, which trades on a different set of fundamentals than other currencies (because of its reserve currency status). Most Street analysts maintain lofty price projections for the spot price of gold in 2012. In my view, the current price correction is a very healthy development and very useful for the long-term trend. I maintain solid expectations for gold and precious metals investments going forward, but picking price targets is arbitrary.
One thing I am predicting with confidence is that mergers and acquisitions in the first half of 2012 are likely to accelerate in the gold sector (see Precious Metals Sector Deal-making Padding Investor Wallets). If the spot price of gold (and silver) settles, rather than resuming an upward trend, precious metals producers are going to see the industry as a great buying opportunity. Both junior and intermediate producers will want to use their currency (share price) and cash hoards to buy up assets and properties. Virtually all mining CEOs are predicting higher spot prices for gold and silver in 2012. I’ll bet the buying and selling of whole companies accelerates in anticipation.