The price of gold one year ago touched an all-time high of over $1,900 per ounce, as investors flocked to the yellow metal in the wake of the first sovereign-debt downgrade in US history and above-target inflation in most emerging markets.
However, the bull market in gold was due for a breather. The Midas metal has punctuated its 700% rally over the past decade with several 10% to 20% pullbacks; the sell-off in May to just over $1,500 per ounce fits the pattern.
Gold is now poised for another surge that will take the metal to well over $2,000 per ounce by the first half of 2013.
The Federal Reserve stands ready to start a third round of quantitative easing (QE3) barring a substantial improvement in the US economy, a distant prospect given recent weak data. That’s driving up inflation worries, which in turn boost gold prices (see chart, “Inflation Expectations”).
Resource nationalism is another potential catalyst. South Africa has long been a leading producer of gold; the country’s mining industry also occupies the front lines in the fight over wealth redistribution. President Jacob Zuma’s reaction to recent inter-union carnage at a major platinum mine was to attack the mining companies, not the perpetrators of violence.
With Zuma’s ruling African National Congress battling to retain its monopoly on power, risk is growing of continued mine company bashing. The more inflated the rhetoric, the less capital is likely to flow into the country. However, any drain of capital or drop in output can only push up prices and directly benefit companies operating elsewhere. Other countries give Africa plenty of competition for high gold production (see the chart, “Gold’s Diverse Origins”).
In the near term, mining stocks’ prices move with the price of what they produce.
Over the long pull, only rising production and growing reserves create value. The larger a mining company becomes, the more difficulty it has in replacing output. Finding meaningful new resources requires going “ever-further, ever-deeper,” often into ever-more politically unstable places.
The upshot? Rarely has there been a better time to invest in gold. All investors should hold at least a portion of their assets in gold, either in physical gold purchases through a dealer or the SPDR Gold Trust Shares (NYSE: GLD) exchange-traded fund.
Also consider the stocks of gold mining companies with strong production growth prospects; here’s a look at one of my favorites.
Goldcorp (NYSE: GG) has the three key value investing qualities I look for in a senior gold producer: strong production growth potential through near-term mine projects, a low cash production cost per ounce and focus on mining jurisdictions with below-average political risk.
Goldcorp will generate just under half of its 2012 gold output from Canada and another one-third from Mexico. In Canada, the company’s largest project is the Red Lake mine in Ontario where it produced 622,000 ounces of gold in 2011 at a cash cost of just $360 per ounce.
Goldcorp also has plans for further expansion of its low-cost Canadian production in coming years. The Cochenour project in the Red Lake district of Ontario is scheduled to come on stream in late 2014 and produce 250,000 to 275,000 ounces of gold per year at a cash cost of around $360 per ounce.
In Quebec, Goldcorp’s Eleonore project is also due for start-up in 2014 and will produce around 600,000 ounces of gold per year at an estimated cash cost of less than $400 per ounce.
Goldcorp’s second-largest mine is Penasquito in Mexico, which started production in 2010 and ramped up to produce over 250,000 ounces in 2011 and an estimated 425,000 ounces in 2012.
The company has a host of additional projects in the latter stages of construction. The list includes its 40%-owned Pueblo Viejo mine in the Dominican Republic that went into production in the middle of this year. The mine is expected to produce between 415,000 and 450,000 ounces of gold per year for its first five years of operation for less than $350 per ounce.
Even more attractive is the Cerro Negro mine in Argentina that’s expected to open in late 2013 and produce more than half a million ounces per year at industry leading cash costs of under $300 per ounce. Last year, the company produced about 2.5 million ounces of gold for a cost of just $529 per ounce.
Management estimates new projects underway across the Americas will boost output 70% by 2016 to over 4.2 million ounces per year. For 5 more picks that stand to benefit from rising demand for precious metals, see my free report.