“Uncertainty” and “worry” are the words describe the current state of the equity market without corporate earnings and new visibility. Second-quarter earnings season can’t come soon enough—it’s what the market is desperately waiting for.
We have a situation where stock prices are bouncing around on the news of the day and an investing marketplace that is hoping that the sovereign debt issue can be contained. This has given a short-term boost to the dollar, but the longer-term trend is for a declining currency. This means that the outlook for the price of gold remains strong.
Investing in gold has proven to be a highly profitable endeavor over the last few years, but everything needs to take a break once in a while. Both silver and gold got a little ahead of themselves, but they definitely were good trades. If I were to pick one precious metal to focus on going forward, it would be gold.
Here we have an industry that’s awash in cash, is highly profitable, and that has limited prospects for large new discoveries (like oil). Gold stocks trade commensurate with the spot price of the commodity (with the exception of major new discoveries) and, in the next upward spike in gold prices, I think we’ll see a wave of consolidation within the industry. Medium-tier producers will want to use their common shares as currency to bulk up on production before the next major leg up in the spot price. A lot of gold mining companies believe that the spot price of gold can hit over $1,750 per ounce this year.
I’d be a buyer of new gold shares in this market. Uncertainty is everywhere, but when a gold mining company says that it expects to produce a certain amount of gold and other byproducts, as well as what the costs are going to be, it’s pretty easy to figure out the kind of cash this business is going to generate. Because the estimating process for mineral resources and extraction is regulated and the industry has high standards of reporting, investors can have a good level of confidence in drill results and business plans for production.
As always, you want to consider an existing producer that’s also drilling for more gold around existing properties. You want a business with lots of cash in the bank, a highly educated and respected management team and, finally, a rising commodity price environment for spot prices.
In the gold mining universe, there are a lot of companies from which to choose, but there aren’t a lot of companies that are producing over 100,000 ounces a year. This makes stock picking within the industry that much easier.
Investing in gold isn’t for everyone; but, in this economy, there’s not a lot of business growth around. In terms of financial success, outperformance is still with precious metal producers and, while everything occurs in waves, the fundamentals, in my view, keep shaping up for gold.