11 Golden Prospects, Courtesy of Bernanke

By Alexander Green

U.S. Federal Reserve Chairman Ben S. Bernanke is caught between a rock and a hard place right now.

Sure, he would prefer that you focus on "core inflation," since it excludes sharply rising food and oil prices. But we all have to eat and we all consume energy. It’s just a matter of time before core inflation starts rising alongside corn, wheat, beef and prices at the pump. 

Ordinarily, the Fed would start raising rates to stave off higher prices. 

But Bernanke really doesn’t want to be an inflation hawk right now. Raising rates would only make the already weakening economy weaker still. (Never good in an election year).

If Bernanke has to choose between a weaker economy and moderately higher inflation, I believe he will choose higher inflation, hoping that he can put the genie back in the bottle once the economy is growing again.

Since gold traditionally rises with inflation, that means now is probably a good time to add to your holdings.

Here are the essential facts:

At one time the world’s monetary system was based on gold. It is a universally recognized store of value. It can be bought and sold in any country.

And it is scarce. There are 4 billion ounces of gold in people’s hands, enough to fill a cube 60 feet on a side. Of this, investors own 1 billion ounces, and central banks another billion, with the remaining 2 billion ounces accounted for by jewelry and other baubles.

Last year, more than 80 million ounces were extracted worldwide. Two-thirds went to jewelry makers and the rest to bullion.

If you want to own gold that you can touch, you can buy bullion. But there will be a markup when you buy it or unload it - and fees to store and insure it. The same is true of coins, especially with numismatics. 

Understand, too, that while gold has been in a major uptrend over the past few years - hitting an all-time high of $1,030.80 on March 17 - shares of the natural-resource companies that bring the gold to market have performed considerably better. That isn’t likely to change.

Over the past 50 years, major gold mining companies have risen at an annual rate of approximately 12%. That’s better than the return of the Standard & Poor’s 500 Index, although the trade-off has been head-snapping volatility along the way.

Perhaps the most conservative way to buy blue chip mining companies is to plunk for a few shares of the Market Vectors Gold Miners (GDX) Exchange Traded Fund.

An ETF, Market Vectors is linked to the AMEX Gold Miners Index and owns all of the world’s leading gold and silver mining companies. That means you can capture the performance of the entire sector in a single, well-diversified investment. 

The annual expense ratio is one half of 1%. The shares can be margined or sold short - and there are options available for traders.

Here are some of the stocks among the Top 10 holdings:

• Newmont Mining Corp. (NEM).
• Freeport McMoRan Copper & Gold Inc. (FCX).
• Barrick Gold Corp. (ABX).
• Anglo American PLC (AAUK).
• Harmony Gold Mining Co. (HMY).
• Kinross Gold Corp. (KGC).
• Yamana Gold Inc. (AUY).
• Gold Fields Ltd. (GFI).
• Agnico-Eagle Mines Ltd. (AEM).

Right now the economy is weak - and the outlook for inflation is poor. But this is creating plenty of profit opportunities - if you know where to look. 

So pick up a few shares of Market Vectors Gold Miners ETF - or talk to a resource broker.  

Tell them Ben Bernanke sent you…

Comments

[phdinsuntanning]

...and be crushed by growing operational and capital costs

[Bob Gary]

Spot on. I buy into this. Good post.

[Brian inMontreal]

Well, cost must be high but may actually come down with oil.

However the GLD and DGP (double gold or double inverse DZZ) might be safer give that stocks are stocks and can fall with the market and costs, even while gold rises.
There are many more posts on Gold and Gold stocks to read as well before speaking with your own analyst to find out how much exposure you need in your account. Many posts talk about how the stocks have been trailing the metal (cost again I suspect) I like DGP because you can use less cash.
Don't forget the posts on kitco.com, Jon Nadler is an incredible read for me every day.

[gigem77]

The growing operational costs are very apparent in the Brazilian properties of AUY. They face higher energy costs plus the currency strength of the Real. But a rising gold price will float all of these boats. Gold will go to 1100 this year as inflation permeates every economy. AUY will be 21 by year end. The others will post similar gains.

[iman]

I'd stay away from South African miners (GFI) too many power problems will cause losses. Barrick does have some hedges in its books, I think AUY and AEM are the lowest cost producers on your list and should have the most upside.

[bold4gold]

Excellent article and recommendations EXCEPT... I would stay away from HMY because of all of the employment problems and geopolitical strife in South Africa.

[relmor]

I would never normally trust an investor who doesn't recommend owning physcial gold or silver when you talk about gold or silver. Its the literally only way you know your gold is going to be there for you when you need it most. Storage fees? I can hold my entire wealth in about 150 coins right now, other than real estate and other hard assets. Most people could have enough emergency money and a good investment with just 20 or so gold Krugerrands or maybe some American Eagles. How hard and expensive is that to store? GLD etf...(They might have the gold, or they might be selling it to short sellers...Read Ted Bulter and the GATA conference for information about gold.

[relmor]

Ted Butler
Peter Schiff
Alex Wallenstien
Kitco.com gold forum is a wealth of information about gold and gold coins. This guy is a pundent to get you from putting your money right where it helps you the most, in physcial form. If just 5% of gold investors demanded physical tomorrow, the price would be uncontrollable. You could see 100 dollar up days, easy. But take paper, and if that bank that guarantees ur paper, or the mint, or whoever cant give you the gold, when everyone of the contracts or certificates gets turned in for delivery, good luck with your gold really being there.

[morgan77]

Freedlee-- I think ETFs are viable options for those not ready to hold physical gold for whatever reasons, be it liquidity, the ease and comfort of holding someone 'stock like.'
here's a recommendation for FCX- www.greenfaucet.com/tr...