All the goldbugs are calling for the end of days this year. Obama this, taxes that. Fiscal cliff. Etc. "You need some good gold investment strategies for 2013," the experts tell us. Should you hold on to that solid dividend stock or should you cash it out due to higher taxes on dividends? Are gold ETFs the way to go, or should you bet all your chips on the "burning match" of the gold industry - junior mining and exploration companies? What about gold bullion? Here are a few things to consider:
Investing in Gold Stocks
Gold stock investors have been bitterly disappointed by lackluster returns. They're coming to the dim realization that, since 2002, the gold price has risen 466 percent while the benchmark index of mining stocks has gone up 344 percent.
Equity investors have been especially depressed since 2010 with bullion prices outpacing mining companies by a factor of 5 to 1. Ouch. OK, enough with the bad news. Here's how to profit from gold stocks in 2013: do your homework.
- Look for companies that have proven reserves. This means ditch the juniors and stick to the established companies that already know what to do with the dirt in front of them.
- Choose companies that invest money into expanding their reserves. It's not enough to have proven reserves. Your company should actively be expanding gold reserves.
- Look for good management. Ideally, you want management that has a proven track record of running a successful mining company. Ideally. If your management is so focused on growth that he's willing to give up profits, stay away. Stay far away. At best, you'll see mediocre returns. At worst, you'll lose money.
- Look for insider buying coupled with good management. Good management plus insider buying equals the closest thing you're going to get to a guaranteed winner. There's an old cliche that management sells stock in its own company for a variety of reasons, but it only buys its own stock for one reason: the management strongly believes it will make money. It's a cliche, but one that usually turns out to be true, assuming the management is competent.
- Don't forget about production. The resources used to expand reserves had better translate into production. Look for companies that have a long, consistent, history of producing. Then, look at how the company's current expansion projects translate into production. Does its strategy make sense? Given the information you have available, and if you were running the company, would you adopt a similar strategy? If not, maybe this stock isn't right for you.
For example, Barrick Gold employed $16 billion of revenue from 2005 to 2011 to grow its reserves. It grew reserves by 51 million oz. That's enough of a buying sign for most investors, but it shouldn't be for you. Dig deeper. It's cost per reserve oz was $313. However, it's actually increase in production was a mere 2.2 million oz. It's final cost for new production? $7,260. Ouch. Gold prices are high, but they're not that high.
It should be no surprise that this company is on Santa's naughty list this year. It spent more than what its product (gold) is worth. Not good for investors. Now, some goldbugs use stuff like this to justify a $7,000+ price prediction for gold (or some kind of similar nonsense), but the reality is that that just isn't happening. Has Barrick made money? Of course it has - just not as much as it could have.
Consider that in January of 2005, Barrick was priced at $21.98. In January of this year, the stock was priced at $47.54. As of last month, the stock sits at about $36. That's a total return of almost 64 percent, or 9 percent annually. That's not absolutely terrible, but gold bullion did much better and you didn't have to deal with the mood swings for the last 7 years.
If you're going to go the equities route, it takes a lot of work to dig underneath the glitz and glam of the marketing department. Don't get me wrong, it's a viable investment strategy. It's just not the easiest. If you're willing to put in the wrench time, though, you get the benefit of up to 3:1 leverage over physical gold without actually having to open a margin account.
Buying Gold Bullion
The other best way to own gold is by buying bullion. Gold bullion rose 440 percent over the last 10 years. Even over the last 5 years, it's done better than most gold stocks (118.14 percent).
I generally don't consider gold an investment because it doesn't produce anything. It's not a business, and it doesn't do anything but sit in vaults. It appreciates relative to fiat currencies which is why investors find it so attractive as an investment. I regard it more as a speculation against the dollar (or some other currency).
Regardless, 2013 is sure to be quite a ride. At this point, the Federal Reserve is favoring more quantitative easing in 2013. If this money makes its way into the marketplace, gold prices could continue to rise - dramatically. Basically, as long as the Fed is willing to hold down interest rates, and people are still fearful of inflation and government expansion, gold should continue to climb.
My Huge Caveat
Lest I be accused of making broad, sweeping, generalizations or specific recommendations for everyone, the key driver in your strategy going into the new year should be knowledge. You must spend considerable time educating yourself on what drives gold
. It's not always inflation. Often, it's a combination of things including political and economic uncertainty, inflation, war, and fear of (or actual growth of) big government. If you keep in mind that it's statism in all its forms (i.e. fascism, communism, the growing "mixed economy" in the U.S.) that strengthens gold bullion, and Capitalism (specifically, the pursuit of profits) that strengthens gold stocks, you should do just fine in 2013 and beyond.