Thinking About Buying Gold? Read This First

During his first speech to the United Nations on Tuesday, President Trump said if threatened the United States would “totally destroy” North Korea. In a September 17 tweet, Trump also mocked the country’s autocratic leader, Kim Jong-un, calling him “Rocket Man” because of Jong-un’s repeated testing of nuclear ballistic missiles.

If bombastic rhetoric like that from an America president isn’t bullish for gold, nothing is.

Thinking about adding gold to your portfolio? Perhaps more than any other investment, the yellow metal is susceptible to manias. If you want exposure to gold, you need to do it the right way.

Here’s the good news: gold doesn’t appear close to peaking, as credible analysts project further gold price appreciation. The price of gold currently hovers at $1,312 an ounce; the bullish consensus is that gold will reach at least $1,500 by year’s end.

The time to gain exposure to select gold assets is now, before geopolitical tensions get even worse and the investment herd starts screaming buy buy buy! By then, you’ll be buying into a bubble. Below, I pinpoint the best-in-class gold investments that trade at attractive entry points.

Stock market timing is a powerful tool, especially when you remember a basic rule of investing: Most of the time, the majority of stocks go up or down together. Even experienced fund managers have trouble consistently finding the market’s “tops” and “bottoms.” A good rule of thumb for identifying these extreme peaks and valleys is to look for extreme behavior.

Classic signs of a bottom include hyperbolic pessimism in the media; extremely high bear signals from professional stock analysts; heavy insider buying at corporations; and huge mutual fund cash reserves. On the other hand, if it ever feels to you that the market is in a buying frenzy, it’s probably a good time to sell (or hold off on buying).

Investors who chose to get into gold toward the end of 2009 learned this lesson the hard way. At the time, everyone was foaming at the mouth over gold, and for a good reason: Gold prices had steadily climbed +40% since the beginning of the year (see chart below).

The Great Gold Bubble

Source: Investing Daily (in $US dollars)

However, while conditions are setting the table for gold, the yellow metal hasn’t reached frenzied levels yet. The SPDR Gold Trust ETF (NYSE: GLD), the exchange-traded fund that’s the benchmark for gold, has generated a year-to-date total return of 14.79%, a healthy gain that only modestly beats the S&P 500’s YTD return of 11.74%. There’s further room for gold to run.

With a stock market correction looming, you need to hedge your portfolio with gold. The traditional yardstick is for an allocation of about 5%-10% in either gold mining stocks, ETFs or physical bullion itself. However, keep in mind: The conditions that are favorable for gold will prove fatal for overvalued stocks that are looking for a trigger to tumble.

When gold prices are on the way up, the biggest profits will come from plays that tag along for the ride. Gold ETFs hold bullion as their only asset but trade just like regular stocks. They move directly in tandem with gold prices. The two major gold ETFs trading in the U.S. are the SPDR Gold Trust and the iShares Comex Gold Trust (NYSE: IAU).

If you’re interested in gold but risk averse, I recommend the SPDR Gold Trust, the most popular bullion ETF and the most liquid physically backed gold offering available. Launched in 2004, GLD was the first gold ETF available in the U.S. GLD seeks to replicate the performance, net of expenses, of the price of gold bullion.

Also consider a new sister fund, SPDR Long Dollar Gold Trust (NYSE: GLDW), the first physically backed gold ETF with a currency hedge against a strong U.S. dollar. GLDW gains when gold prices spike and the value of the dollar increases. Historically, a stronger dollar has been a drag on gold prices. But if both gold and the greenback rise together, GLDW’s investors win both ways.

Gold mining stocks follow the price of gold somewhat, but there is more risk since these companies also need to contend with the trials and tribulations of running mining and production operations. However, when these companies reap profits, they tend to be very big.

Consider one of the world’s fastest-growing gold miners, Goldcorp (NYSE: GG). Headquartered in Vancouver, British Columbia, Canada, this senior gold miner boasts operations and development projects throughout the Americas.

With a market cap of $10.6 billion, Goldcorp enjoys many advantages over its more volatile rivals, including production growth combined with low cash costs, a strong balance sheet, and operating jurisdictions that are politically safe.

The average analyst expectation is that GG’s year-over-year earnings growth will reach 29% for the current year and 25% next year.

Also consider Barrick Gold (NYSE: ABX). With a market cap of $18.9 billion, Barrick Gold is one of the more stable and proven gold miners. ABX also is in growth mode. The company is undergoing several large-scale development projects but is talking more openly about acquisition opportunities. The average analyst expectation is that ABX’s year-over-year earnings growth will reach 5.7% for the current year and 5.4% next year.

Setting the (gold) bar higher…

If you’re an aggressive investor, consider junior gold miner Pershing Gold (NSDQ: PGLC). With a market cap of $84.3 million, Pershing Gold is an efficient producer with a strong balance sheet that’s aggressively expanding operations.

Headquartered in Colorado, the company’s principal growth driver is the Relief Canyon Mine in Pershing County, southwestern Nevada, where it operates low-cost but highly productive mining facilities.

The Relief Canyon Mine comprises about 25,000 acres in Pershing County, made up of about 948 owned unpatented mining claims, 120 owned millsite claims, 172 leased unpatented mining claims, and 2,235 acres of leased and 2,770 acres of subleased private lands.

Pershing’s Relief Canyon Mine got a boost on August 31 from Uncle Sam, when the U.S. Secretary of the Interior issued an order to significantly streamline the Environmental Impact Statement process by imposing a limit of 12 months to complete. This order is manna for PGLC’s Relief Canyon project; the company expects to submit to the government its expansion plans for the project by early next year.

The takeaway from the Interior Department’s order is that Pershing can mine below the water table, which enhances the company’s Net Asset Value (NAV), because the company now has more gold available to extract in an already proven mine. The firm’s NAV of $4.27 per share is more than double its market cap.

The average analyst expectation is that PGLC’s year-over-year earnings growth will reach 42.7% for the current year and a whopping 123.3% next year. PGLC offers greater capital appreciation potential than its larger peers. But take note: Pershing also is a small-cap stock that confers greater risk and isn’t appropriate for conservative investors.

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