5 Profit Plays for Gold Amid Economic Mire

By Mike Caggeso

Spot price of gold eclipsed $935 in trading Monday, its first time above the mark since May 22, as another fresh round of record oil prices exacerbated existing market-wide turmoil.

In light of the Federal Reserve’s decision to hold interest rates at 2.0% - its first rate freeze since September 2007 - many thought the dollar would rebound, and in turn, sweep the legs out from under gold.

But the opposite proved true and gold rallied to its highest price in more than a month.

As Money Morning contributing editor Martin Hutchinson recently pointed out, gold remains strong because the leading central banks around the world aren’t curbing inflation the same way, if they even are at all.

The most recent examples are the U.S. Fed and European Central Bank, of which the latter is strongly indicating its intention to raise interest rates at its next meeting. And when it does, it will catapult the euro further ahead of the dollar (despite a U.S. rate freeze) and send investors flocking back to gold.

"During that period, expect speculative demand for gold to intensify and its price to increase steeply," Hutchinson said. "The longer the period before the Fed is forced to increase interest rates, the higher gold will go."

So far, Hutchinson has been proven right. Since before the Fed announced its rate freeze Wednesday, gold has gained more than $55 an ounce, RTT News reported.

Also, gold prices are closely tied to oil prices, which broke records last week and again Monday, trading above $143 a barrel. In recent history, the two have trended on parallel paths.

"If you look at the past 100 years, the gold price was always 10 or 12 times that of oil prices," Moaz Barakat, the managing director of the World Gold Council, told MoneyWeek. "With oil basically around $100 a barrel, gold prices should be at $1,000 or $1,200. That’s the magic relationship between the two."

Profit Plays for Gold

Until the Fed reverses its monetary policy strategy and increases interest rates, gold is one of the best investment bets available in an uncertain economic climate.
Money Morning suggests five gold plays to consider while gold prices are down from their highs:

• The StreetTracks Gold ETF (GLD), which tracks the gold price directly, making it the simplest way to play gold. And with a $17 billion-plus market cap, it has ample liquidity.

• Barrick Gold Corp. (ABX) is a Toronto-based company with mostly North American production, as well as properties in South America and Africa, and some copper and zinc add-ons. It has a $38 billion market capitalization, so there’s plenty of liquidity. By gold-mining standards, this company has a substantial presence, is reasonably valued, and has little political risk. The company also recently sent some very bullish signals to the market and reasserted its confidence in meeting its 2008 output target of up to 8.1 million ounces of gold. [For more details, check out a recent related story about Barrick Gold].

• Yamana Gold Inc. (AUY) is another U.S.-listed/Canada-based company, but this one does its mining in Brazil, Argentina, Chile, Honduras and Nicaragua. Despite its geographic reach, it faces only a medium geopolitical risk. Expect the company to double production to 2.2 million ounces per year by 2012, primarily in Brazil and Argentina. 

• Gold Fields Ltd. (GFI) is a South African company that mines in South Africa, Ghana, Australia and Venezuela (where it just sold control to a local company, reducing its exposure to an arguably risky market). It faces a somewhat upper-medium political risk, depending on what you think of South Africa, where the electricity supply to the gold mines is currently unreliable and there’s a good chance of Jacob Zuma winning the presidency in April 2009. Given his record as an anti-Western leftist, and the corruption charges he faces, his potential return can only be viewed as a major negative.

• Kinross Gold Corp. (KGC), another U.S.-listed Canadian company, engages in gold and silver mining, with primary operations in Canada, the United States, Brazil, Chile and Russia. In February, Kinross issued shares to buy a large company with operations in both Brazil and Russia. The political risk is low-medium.

Comments

[sliman]

Take a look at DGP. It does double the move of gold. Gold is ready to break out big.

[daniela]

Thank you for your analysis of the current situation. It answered all of my questions. I guess I don't need to worry now about gold's volatility as much.

[blink0404]

Great article, clear, solid recommendations!!
This is your key sentence:
"Until the Fed reverses its monetary policy strategy and increases interest rates, gold is one of the best investment bets available in an uncertain economic climate."
I imagine that we just have a few more months of great movement for gold and I especially like DGP and GLD.
If you're interested in holding gold longterm, which I'm not sure is wise, check out this article on GLD LEAPS: www.greenfaucet.com/tr...

With the leaps, you have the option to buy a substantial amount for a lower cost, carry less risk, and make a similar profit. Of course this is only a good thing if GLD keeps going up, which is questionably towards the end of the summer.

Hope it's informative.

[Vibhor]

Hi,
What i your opinion is a greater driver for gold stocks: is it attributable reserves, or lower hedge book ratio, or cash costs? I have been tracking stocks such as randgold , harmony and goldfields; 1) all of these are completely dehedged 2) randgold has the lowest cash costs, hence its leverage to gold movement should be lowest 3) but randgold is highest correlated to gold spot.

Could you throw some light on this?

[goldN]

Even when the Fed begins to raise rates, gold will continue to climb. Any rate rises will take time before they can stop or reverse inflation. Look at the 1970's. Gold skyrocketed even after Volker started raising rates. Also with ECB raising rates they pretty much nullify similar increases by the FED.