At some point in every gold rally, the market flips a switch and gold mining stocks start to outperform gold itself. I think we’re at that inflection point now. Analysts on Wall Street are calling for gold to hit $1500 an ounce by December 2011. That would be roughly 18% above the record $1266.50 reached on June 21.
But I think you can do even better in gold stocks during that time because the operating leverage of gold miners gives you more upside than the metal does. At this point I’d be looking at the majors such as Barrick Gold (ABX), Goldcorp (GG), and Newmont Mining (NEM) because they have a heavy weighting in the gold ETFs that are a big favorite of investors right now. My pick of the three would be Newmont Mining. (I already own shares of Goldcorp in Jubak’s Picks.)
You might even get shares of Newmont on a slight dip in the next few days as investors decide that they’re more enthusiastic about the U.S economy than they were and switch some funds to growth. But in the mid-term I’d say investors from hedge funds to individuals will continue to act like they can’t get enough bullion. Holdings of gold through bullion-backed ETFs are at 2,075 metric tons. That’s just 0.1% below the all-time high.
But the trends say that demand is headed higher. Normally when gold prices get this high it kills demand for gold from the jewelry markets. Not this time—so far. According to the World Gold Council, demand for gold in the second quarter fell by just 5% in spite of higher gold prices. Demand from India, the biggest jewelry gold market in the world, was down just 2% from the second quarter of 2009. Doesn’t look like falling jewelry demand is going to slam on the brakes.
Investment demand is still climbing. Despite high prices, investors have added to their gold positions through ETFs for the last three weeks in a row. Traders and investors see gold as a refuge in the current uncertainty and with yields on bonds and other income investments at historic lows, the fact that gold doesn’t pay a yield doesn’t seem especially important.
It certainly doesn’t hurt investment demand that in 2010 gold has outperformed just about everything else with a 13% gain since January. That’s better than the 8.4% return from Treasuries, the 8% drop in equities as measured by the MSCI World Index, and the 10% decline in the 24 commodities included in the S&P GSCI Total Return Index.
And central banks, which have been net sellers over the last decade, are now buyers in the case of China, Russia, and the Gulf countries.
The rising price of gold gets amplified by the operating leverage at gold mining companies. A high proportion of the cost of mining and refining an ounce of gold is fixed. At, say, a gold price of $600 an ounce, a gold miner might just break even. But at $1200 an ounce, $600 an ounce would fall to the bottom line. Same production in ounces. Twice as much profit.
So while Wall Street analysts are predicting that gold the metal will climb by 18% by December 2011, they’re projecting that earnings at Newmont Mining, the largest U.S. gold producer, will climb 47% this year, according to estimates compiled by Bloomberg.
You do get more than just gold with a buy of Newmont, though. The company has proven and probable reserves of 92 million ounces of gold and reserves of 9.1 billion pounds of copper. Copper recently has been the commodity most closely linked to the course of the global economy so an improvement in global growth (or even just global growth prospects) will give Newmont an earnings boost.
The stock has decisively moved above its 50-day moving average. Next challenge? The 52-week high at $63.38.
As of September 3 I’m adding this stock to Jubak’s Picks with a target price of  $71 a share by May 2011.
Full disclosure:  I don’t own shares of any company mentioned in this post in my personal portfolio.
I’ve been attempting to get into JUBAX through Vanguard. Finally was able to buy in.
ruters78, in the short term Dan is correct. Long-term at this point I can’t tell you. I started a mutual fund in July and getting that portfolio built is taking a lot of time right now. How that will work load will shake out over the next year or so, I can’t tell you now.
yx, Morningstar’s price targets tend to be very conservative and difficult to implement, in my opinion. Here’s what the site was saying about targets for NEM as of this morning (analyst report is dated 7/28 tho). Fair value is $50. So clearly a sell, right? Well, no. Morningstar says consider selling at $100. Of course, they say consider buying at $25. Stock on July 28 was at $55.
ruters78, the blog postings on jubakam.com are much more frequesnt than on jubakpicks.com. I think Jim has limited his postings on this site to 1-2 a day while on the other site it holds at nearly 4-5 a day. He also offers insite on a wider variety of topics.
Yesterday, MSN reported that Morningstar just put NEM into “Do not buy” list. I wonder what’s Jim’s comment on that.
Its part of the Jubak Asset Management and costs $299, but comes free with the purchase of JUBAX.
Didn’t know there was another jubak blog. What’s the address?
A question for those intrepid investors who have bought JUBAX. Is the level of posting and information that comes with it substantially greater than this blog?
I feel like the posting frequency has declined on this blog and am wondering if its any better with the Jubak AM blog.
It looks expensive to me at current levels and will pass.
java12jack,
A lot of CODI’s debt comes due in 2013. If you do buy it, watch the insider selling like a hawk.
Ed,
Do you think that CODI has the abililty to keep paying this divy? Also the short interest is high on this stock.
Thanks
java12jack,
CODI is a fascinating little stock. Even though they took a loss last quarter, that was due to an acquisition.
The one thing that impressed me the most about the company is how much insider buying has taken place there. It’s a fairly impressive list.
If I were going to buy it, and it is mighty tempting, I wouldn’t pay more than $14, and would prefer getting it under $13 if possible.
After doing some checking I have found that the stock is trading high. It’s stock chart looks like my bank account, that’s a little hard to handle. I’d like to see if the stock could pull back 3 to 5% in the next few weeks. Jim thank you for posting a trading shift such as this one.
faroos, I tend to share your analysis.
I had shorted the market: I now sell these shorts to buy gold mines.
wsm:
Actually, I just looked at other people’s research on Jubak’s (and others) fearless predictions (you can easily find several sites who track other people predictions) and compared to a few of them, for which I have recorded the numbers.
In general (and, once again, it is not the result of my own), BUY forecasts are overoptimistic, so, if I agree with a BUY prediction, I do not really trust the target price. That is why I only consider those Jim’s recommendations which carry a substantial potential for growth. Say, 50% in 1 year (or, in my opinion, more realistic 25%, which is still good) is an interesting proposition. It typically means that this particular stock is substantially overlooked, and it is worth spending some more time on research. Everything that is considered to be undervalued by 10% can be described as an uncertainty of measurements. If I think that I know something about the company that Jim does not know, I might give it a shot. But, most of the time, I just pay very little attention.
@ viwi:
“You put a target price $71. I checked it back couple years, and it looks to me that your average target price is in most of the cases higher than the actual one. So, I am making a correction (once again, using historically averaged one) and get about $67, which is just couple bucks above the current price.”
It sounds like you may have come across something potentially intriguing here. Unfortunately, your description is extremely ambiguous. Can you please explain better what you are getting at, as well as your methodology for how you arrived at your conclusion?
Faroos: Personally I would not sell any stocks based on that argument. No one really knows which way any particular market sector is going to head over the next year or two. You want stocks that tend move in opposite directions in your portfolio, because that reduces your short-term risk. Jim has a hold on stocks from many different sectors (a buy without a subsequent sell), even though he now is putting a buy on NEM. I think that is a good approach.
looking at gold price in the past, it seems to me that it is moving in the apposite direction from the stock market.
So I feel if i am buying into gold companies now then i believe that the stock market would be going down in the coming period. And perhaps I need to sell my technology stocks as well.
i know it is very simplistic of me, but does this make any logic to you all.
Algalli and others,
The “3 day notice” has always been that Jim would buy or sell for his personal account 3 days after posting here (If he wanted to buy or sell). That was done so people couldn’t say that Jim was posting and then trying to take advantage of the market reacting to this post. Given that he stated “I don’t own shares of any company mentioned in this post in my personal portfolio.” And that Jim has stated that most of his money is now in his new fund, there isn’t anything for him to announce (i.e. he is not buying/selling this stock in his personal account based on this recommendation).
Only two kinds of people in the world [or so they say]:
Those that buy the stock of mining companies, and those that work for them…
Jim has always suggested that gold is a fine long-term investment, which it undoubtedly is, in our current highly unknowable economic curcumstances. Heavy em-PHA-sis on long-term, not momentum [altho that momentum is certainly there, now.]
I’m always in favor of the lower risk approach of course, so if you insist on owning gold miners you may rather buy em all- in an ETF name of GDX [there are others.] I believe Jim has mentioned this as well- at least in his book.
Then pray to your deity and cross yer fingers and hold on for the thrills… approximately forever.
Ed,
Off subject have you ever looked at CODI? It has had a nice run up over the last year and would only pick it up on a pullback but sports a high divy. Would like your opinion on it.
Thanks!
Jim,
I have a somewhat naive question. Is NEM better than cash? or, better, solid gold? It has only 1% dividend, stock does not have strong technical indications to move up.
You put a target price $71. I checked it back couple years, and it looks to me that your average target price is in most of the cases higher than the actual one. So, I am making a correction (once again, using historically averaged one) and get about $67, which is just couple bucks above the current price. Should I be excited? I seems to me that MCD and WMT will be doing much better in recession (with their 3% dividend) and are less riskier.
P.S. Are there any new IPO’s coming, which might have a splash? People are talking about Nanosolar IPO for more than a year, but I do not see it’s coming …
Jim’s argument for this pick seems more momentum-based than usual. I tend to be skeptical of momentum-based arguments, although I’ll admit they do work in the right hands. Personally I think the best reason to own gold mining stocks is that their correlation is so low with everything else, so they are good diversifiers. The last decades is a good illustration of this: NEM has had a good run while the market as a whole has slipped backwards. However, that could imply that now may not be the best time to load up on gold, so that only increases my skepticism.
I’ll pass on NEM. Now watch the dang thing double from here.
You are better off sometimes, not having a 3 days notice, as I purchased NEM on the 1st at 61.89. Buy now!
Thanks for the pick Jim I’m going to look into this company.
I have heard a lot of people saying gold is not dead so guess that means gold is yesterdays oil.
taterbug820,
I think Jubax is only available though his site. Jim has a whole long thing which company do you trade with and he’ll get back to us when it’s set up.
@taterbug820 – I got in via the lnink below. It allows you one time + recurring investments if you wish to (which is how I set it up) which get taken out of your bank.
http://jubakfund.com/invest-in-jubax/invest/
Jim, I have tried numerous different ways to purchase jubax but have not been successful yet. I have a fidelity account and Wachovia account and not able to purchase through either one. Can you or anyone else tell me how they/ to get in?
Thanks, Jim. This is what I have been waiting for.
Jim
Now that you are managing a fund will you be giving us 3 days notice befroe you by and sell as you have in the past?
Thanks