Jubak's Journal Recent articles: • Prepare for the global money crunch, 4/5/2005 • Say goodbye to easy money, 4/1/2005 • Blue chips that deserve the name, 3/29/2005 More... | Jubak's Journal A golden way to play the dollar's fall Gold is a hedge against a declining dollar. If you don't want to buy the metal, gold stocks and ETFs offer other ways to profit. By Jim Jubak Owning gold in your portfolio is insurance against the Federal Reserve losing control of inflation or the dollar sinking lower. If inflation spikes or the dollar loses more value, gold, the asset of first resort when investors start to worry about the value of paper money, will go up in price. The time to buy insurance, of course, is before you need it, and when the premiums are cheap. Now, thanks to a dip in the price of the yellow metal itself, buying gold as insurance is a particularly good deal. What's caused the drop in gold prices from the December high of $458 an ounce to around $425 (for spot delivery) today? The same factor that'll send the price higher when the recent trend reverses soon. The dollar has staged a temporary rally against other currencies, which drives down the price of gold because fewer investors feel the need to own it as a hedge against a falling dollar. But since nothing fundamental has changed about the huge U.S. trade deficit, the dollar's rally is likely to be one of those short rallies that punctuate longer declines.
Investors looking to use gold as a hedge have two options: gold stocks or the commodity itself. If the goal is portfolio insurance, gold stocks get my nod because they're leveraged to the price of gold and move more rapidly than the price of gold itself. With gold stocks, you get more portfolio insurance for the buck. The key ingredients What do you look for in a gold stock? On the basis of those four factors, here are the three gold stock picks I made during my Wednesday appearance on CNBC's "Morning Call." The biggest Its geographic diversity means that Newmont's costs aren't just in U.S. dollars, which keeps the stock from being a perfect weak-dollar hedge. But the company's relatively low cost of production -- $232 an ounce in 2004 -- and huge production of 7 million ounces in 2004 give the shares huge leverage to the price of gold. Morningstar calculates that each $10 change in the price of gold adds about $60 million to the company's net income. Newmont Mining recorded net income of $435 million in 2004, or 98 cents a share. As of December 31, Newmont had $1.6 billion in cash and cash equivalents. Look for an acquisition in 2005. Our StockScouter rated the stock an 8 out of a possible 10 on April 6. A costly practice The big leagues But even before the deal Goldcorp was on investors' radar screens because of the incredibly rich ore deposits at its Ontario mine. Thanks to deposits that are at least two times richer in gold than at other North American mines, Goldcorp's Red Lake Mine produced gold at a cost of just $128 an ounce in 2004. The company overall showed a production cost of just $161 an ounce, a full $71 an ounce better than Newmont. Its cost will rise with the addition of the new mines acquired with Wheaton River, but will still remain one of the industry's lowest. Unlike every other gold company I know of, Goldcorp withheld produced gold from sale last year in anticipation of higher prices. That gold -- about one-third of 2004 production -- provides the cash for further acquisitions. The company has no debt. Our StockScouter rated the stock a 5 on April 6. Exclusive picks I also have two exclusive picks for readers of CNBC.com on MSN. Thanks to exchange-traded funds, or ETFs, investors who want to hedge their portfolio with gold but who don't like the volatility of gold mining stocks have an alternative to all the tradition and often awkward ways of buying the metal itself. streetTRACKS Gold Trust Editor's Note: A new Jubaks Journal is posted every Tuesday and Friday. E-mail Jim Jubak at jjmail@microsoft.com. At the time of publication, Jim Jubak owned or controlled shares in the following equities mentioned in this column: Newmont Mining and Placer Dome. He does not own short positions in any stock mentioned in this column. | ||||||||||||||||
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