More hard reality is coming to the stock market and those commodities that will benefit from the headwinds coming our way. The spot price of gold has been going up on a weaker U.S. dollar, which has been going down because of worries regarding the global economy. Gold looks good here, and $2,000 an ounce by early 2013 is a real possibility.
A lot of gold stocks recently hit a wall, not just because of stalling of the spot price of gold, but because of their valuations. The perfect example of this is industry benchmark Yamana Gold Inc. (NYSE/AUY), which has followed spot gold in its turnaround since August. Since then, this well-managed gold producer is up five full points and currently boasts a price-to-earnings (P/E) ratio of approximately 40. Wall Street analysts recently increased their earnings expectations for the company in 2013, but what this stock needs now is a rising spot price in order to break out. Yamana Gold’s stock chart is featured below:
Chart courtesy of www.StockCharts.com
This is the big thing with gold stocks; no matter how good the story is or how much an earnings report beats the Street, gold stocks don’t really go up unless the spot price of gold is doing so. It’s a reality of precious metal investing; it’s a reality of most commodity-related securities.
Balanced equity portfolios should already have some exposure to gold, either through individual gold stocks, a fund, or an exchange-traded fund (ETF). No matter what happens to the U.S. economy going forward, the fundamentals for gold support a rising spot price environment. Sovereign debt, a weaker U.S. dollar, increasing money supply, massive deficits—you name the risk, gold is the natural beneficiary.
Investment risk is always high when dealing with commodity-related securities, and even with today’s strong backdrop for gold, individual gold stocks follow their own stories. Newmont Mining Corporation (NYSE/NEM), for example, is one of the most well-known, large-cap gold stocks. This stock has struggled lately due to rising production costs and a high valuation.
So, like in any industry, if you are speculating in gold stocks, you have to do your research. (See “Mining Stocks Getting Exactly What They Need.”) This is why ETFs or gold trusts make a lot of sense for the passive investor who wants exposure to gold, but not individual company risk. The next major hurdle for spot gold prices will be $1,750, and I think they’ll get there very soon. Fiscal reality is now the biggest challenge facing the global economy.