Now Is an Incredible Time to Buy Gold Stocks
By Matt Badiali
May 1, 2008
Today, I'd like you to imagine a hot-dog business...
After buying your cart, permits, insurance, hot dogs, buns, and condiments, you hit the street. You sell hot dogs people will happily pay $2 for. Let's say it costs you about $1.50 to produce a hot dog, so you're making a gross profit of $0.50 per unit.
Now let's say, all of a sudden, folks are willing to pay you $6 per hot dog. They'll buy as many dogs at $6 as you can make. Your profit-generating ability has soared, from $0.50 to $4.50. Now... do you think your business would be worth more to an outside buyer? I think it would... but that's not how folks see the gold mining industry right now.
America's largest gold producer, Newmont Mining (NEM), announced its first-quarter earnings last week. The company's revenue was 60% higher than the quarter one year ago. It sold its gold for an average $933 per ounce during the quarter, up 40% from the same time in 2007. Newmont cut its cost per ounce a bit, but of course, the real kicker was the gold price. People are paying a lot more for Newmont's hot dogs.
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Do you know what happened to Newmont's share price? It fell. I could hear Rodney Dangerfield speaking to me from the grave... Newmont got no respect, not even from investors who should know better.
This lack of respect is pervasive across the entire gold industry right now... and it's giving investors a fantastic opportunity to get into these stocks.
Gold prices have doubled from $427 in April 2005 to about $879 today. Yet the share prices of major gold producers haven't done much at all. Newmont Mining's shares appreciated a meager 6% over that same period.
Typically, shares of gold producers give you "leverage" to the price of gold... meaning that if gold doubles in price, gold stocks often quadruple in price. It all comes down to the "leverage effect"...
If Gold Company A can mine gold for $250 an ounce and sell that gold for $300 an ounce, it makes a profit of $50 an ounce. However, if the gold price jumps 50% to $450 an ounce, Gold Company A's profit per ounce increases from $50 to $200... a gain of 300%.
Now let's say the price of gold really gets rocking, increasing 100% to $600 an ounce. Gold Company A's profits increase dramatically... They jump sevenfold from $50 per ounce to $350 an ounce! Of course, Gold Company A's stock price would explode higher in response to the increased profits.
However, it hasn't quite worked out that way in the past few years. Due to the soaring costs of fuel, equipment, and upgrading facilities, the costs to mine gold have risen nearly as much as the gold itself!
On May 1, 2006, the AMEX Gold Bugs index (HUI), which tracks the big gold mining companies, closed at 380. Yesterday it closed at 389. The index basically moved sideways... during a period in which gold gained about 32%. As David Galland pointed out in this essay, the gold industry has been busy "digesting" the higher costs it pays to pull gold out of the ground.
But I think the news from Newmont is the latest sign that gold miners are now really starting to rake in the cash... Newmont's quarterly profit rose 444% over the first quarter of 2007. The elevated gold price is finally kicking in. And the situation is the same with other big miners, including Barrick and Goldcorp... But like Newmont, these stocks are sitting dormant right now.
That's why I have so many "buy" recommendations in my S&A Prospector portfolio right now. With just a few exceptions, I think gold equities are incredibly cheap. For a relatively conservative portfolio, you should own producers, like Newmont. But for opportunities to make 1,000% quickly, I love prospect generators.
If you don't have exposure to gold stocks yet, now is the time to get some. I believe gold's bull market will last a long, long time... and will continue to massively increase the cash flow to those who mine it.
Good investing,
Matt
P.S. As I mentioned... the tiny class of mining companies called "prospect generators" are a huge opportunity right now to make at least 1,000% gains from the bull market in gold. Click here to learn the best way to invest in them.
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