Barron's article on gold

Posted on 01 November 2008 with no comments from readers

I like the contrarian approach of Barron’s and this is a nice article for gold bugs who are feeling long on self-pity and short on their investments… here are the highlights:

“The yellow metal, which breached $1,000 an ounce in March during the Bear Stearns debacle, could well return to that level and head toward $2,500 as investors scramble for safety, according to many fans.

“It is premature to declare an end to the bull market in gold and the bear market in paper,” John Hathaway, portfolio manager of Tocqueville Asset Management, wrote recently. “It is more likely that this massive shakeout has set the stage for a dynamic advance.” Barron’s Roundtable member Marc Faber puts it more succinctly: “Gold will go up because everything else is in deep shit.”

…James Turk, founder of Goldmoney.com, sees gold at $1,100 or $1,200 an ounce by year-end. “…With markets melting down, uncertainty about the safety of assets and growing concern about counterparty risk, people look to assets with safe-haven status,” Turk says. A longtime gold bug, Turk sees gold eventually hitting a dizzying $7,000 an ounce.

Charles Oliver, manager of the Sprott Gold and Precious Minerals Fund in Toronto, has a more restrained target of $2,000 within four years. But even that is nearly triple the current price.

When it comes to gold, such movements aren’t so unusual. Since Barron’s penned a bullish piece on the yellow metal nearly three years ago (“Golden Opportunity?” Dec. 26, 2005), it’s up nearly 60%.
Taking the Measure : The ratio of an ounce of gold’s price to the Dow has been falling, a bullish sign for the metal.

The technical signals, too, favor a rise. One key measure — the Dow Jones Industrial Average divided by the price of an ounce of gold — has lately been flashing bullish at about 11, down from more than 40 around the turn of the millennium. In the past two cycles, “gold did not peak, and the DJIA did not bottom, until this ratio was in the low single digits,” writes John Roque, managing director and market technician for Natixis Bleichroeder.

Gold’s outperformance against the blue-chip index tends to last at least 14 years.

Mining shares can’t be ruled out entirely. In fact, mining companies should soon benefit not only from high gold prices but declining energy tabs, which lower the companies’ costs.

“Even if the price of gold fell in half, gold stocks would still be fairly valued,” says Steve Lehman, senior portfolio manager of the $1.8 billion Federated Market Opportunity Fund, which counts names like Yamana (AUY), Barrick (ABX) and Newmont Mining (NEM) among its largest holdings.

Oliver, of Sprott Precious Minerals Fund, is partial to companies like Goldcorp (GG), which has some of the lowest-cost mines, and Iamgold (IAG), which, in his view, at $3.07 a share is trading at a discount to the sum of its parts. For those with a bit more of an appetite for risk, Oliver suggests Kinross (KGC), a $7 billion market-value company that he says is trading at a discount to its net asset value.

Another option: Market Vectors Gold Miners (GDX), an exchange-traded fund of gold mining and exploration companies.”

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