Why gold stocks are a buy
Posted
Jun 26 2009, 03:57 PM
by
Anthony Mirhaydari
Rating:
It may seem like a funny time to be talking about gold stocks. After all, gold prices haven't been doing much lately as inflation expectations have ebbed and the dollar has stabilized. Gold's role as a safe haven asset hasn't been in high demand either as stock market volatility has plunged to levels not seen since last September.
But I see a number of compelling reasons to take a closer look. For one, as I discussed earlier, volatility expectations have reached levels associated with significant tops in the stock markets. An increase in volatility would cause investors to dump risky stocks and bonds in favor of more stable stores of value like gold. Despite Thursday's big rise, breadth and volume trends still suggest lower prices are needed to reverse the big decline in buying power seen since the beginning of May.
Another problem is that the U.S. dollar has come under renewed pressure after China's central bank repeated its call to create a global currency. In its latest annual stability report, the People's Bank of China said it saw serious problems in one currency dominating global financial markets -- a veiled reference to the dollar. These comments raise concerns that China could start shifting its massive foreign exchange reserves away from dollar denominated assets. This would send the dollar tumbling, increase U.S. inflation, and send gold higher.
And finally, speaking of inflation, none other than former Federal Reserve chairman Alan Greenspan is out with a new opinion piece today outlining his case that inflation, not deflation, is now the real threat to the economy. In his words: "If political pressures prevent central banks from reining in their inflated balance sheets in a timely manner, statistical analysis suggests the emergence of inflation by 2012; earlier if markets anticipate a prolonged period of elevated money supply." From a low of 3.3% in 2005, the money supply is growing at nearly a 10% annual rate and shows no signs of abating. A rise in inflation expectations will refocus investor attention on the gold sector.
All of these factors are a reflection of gold's status as a unique asset class. But what of the business fundamentals for companies in the business of extracting gold from the Earth's soil? Check back next week for a post on how the coming supply crunch will further increase margins in an industry where profits have steadily increased over the last 20 years.
For now, I am adding positions in Compania de Minas Buenaventura SA (BVN) and Goldcorp (GG) to my portfolio at Wall Street Survivor. Both have just touched technical support levels and remain in 8-month old up trends. BVN has been operating gold and silver mines in Peru since 1953. The company has relationships with a number of affiliate companies that diversifies its revenue base: For example, it has a 43% stake in Yanacocha, which is the largest gold mine in South America.
Goldcorp, in addition to other properties, operates Red Lake -- which is Canada's largest gold mine. The property is a low cost producer of some of the highest grade gold in the world. It's expected to remain in operation until 2023.
My positions
It was a tough week for my other holdings -- with two positions stopping out -- as the market selloff I expected never materialized. We've seen intense selling in each of the last two Monday sessions -- with down volume accounting for more than 90% of total volume -- a sign that institutional traders are liquidating positions ahead of a deeper slump. Historically, these intense selling events are followed by rally lasting a few days before the downtrend resumes. I'll be watching, and when the time is right, will put my short positions back on.
Disclosure: The author does not own or control a position in any of the funds or companies mentioned.
Anthony Mirhaydari is a researcher for the Strategic Advantage investment newsletter. He can be contacted at anthony.mirhaydari@live.com. Feel free to comment below.
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