The first six months of 2008 exhibited the kind of irrational exuberance in gold prices usually only reserved for stocks. Yamana Gold CEO Peter Marrone boldly predicted in March that gold would hit $1,500 an ounce by the end of the year. His prediction wasn't close, finishing well below his best guess. The price of gold per ounce cracked the $1,000 mark for three consecutive days starting March 14. In July, it again got close, hitting $977 before dropping back in concert with oil prices and most other commodities as it became apparent the world was reeling from a global slowdown.
Analysts suggested supply and demand had little bearing on price. They felt the worldwide economy was under a huge stress, forcing investors to buy gold, something that would maintain its value in a severe depression. Just like back in the 1980s, this feeling will pass.
Gold Took a Smaller Hit
While the price of gold dropped in 2008, it did so at a rate far less than most other metals including copper and zinc as well as the S&P 500. If you bought gold at the end of 2007, you can't be upset with your returns, despite being in the red. Interestingly enough, gold is trading at the same levels it did in 1980. Factoring inflation, gold is worth less today than 28 years ago. How you choose to interpret this fact likely determines your opinion about the future direction of gold prices. I tend to think it means less than the gold bugs would like to believe. If you're fond of gold, however, you probably see this as a clear sign that gold is significantly undervalued. I'm not so sure.
On the topic of gold, Warren Buffett once said "It gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head." He has a point. (For related readings, check out Does It Still Pay To Invest In Gold?)
2009 And Beyond
Gold experts suggest demand is at record levels, increasing by 45% in the third quarter alone. Apparently, everyday people like you and me were scooping up gold bars and coins as fast as we could get our hands on them. Despite this demand, inflation eased around the world and gold prices dropped 6% in the third quarter, then they dropped 17% in October as financial markets took it on the chin. The big question in 2009 is whether inflation will rear its ugly head once again. I don't see it.
Consumers are sufficiently spooked to rein in spending for some time to come. Gold followers most likely are hoping for the successful resuscitation of the Big Three car companies, just the kind of catalyst to jump-start the economy and re-ignite inflation. Regardless, it won't happen until 2010 or beyond.
Stocks, Mutual Funds or ETFs?
If I had to make a gold play, I'd probably invest in some gold-related exchange-traded fund (ETF). ETFs are simple, cost efficient and properly diversified. In terms of stocks, two giants that make a lot of sense are Barrick Gold (NYSE:ABX) and Goldcorp (NYSE:GG). They are equal partners in the Pueblo Viejo mine development in the Dominican Republic, which is expected to come online sometime in 2011 and produce 22 million ounces of the yellow metal. While Barrick is bigger and more conservatively financed, Goldcorp mines its gold at a lower cost per ounce. Having said that, Barrick's stock trades at a forward P/E of around 15, which is much more attractive than Goldcorp's at over 30.
Two alternatives are mid-caps Agnico-Eagle Mines (NYSE:AEM) and Harmony Gold Mining (NYSE:HMY). Agnico-Eagle's revenue and earnings estimates for 2009 are $701 million and 94 cents per share respectively. Harmony's estimated numbers for 2009 call for revenues of $1.3 billion and EPS of 36 cents. Both are excellent. (For related reading, see The Gold Showdown: ETFs Versus Futures and Getting Into The Gold Market.)
Over the years, gold has been a favorite for investors looking to preserve their wealth. It can also be used as a diversification factor due to its low correlation to equities, real estate and bonds. I love low-cost producers of anything which is why Goldcorp looks so attractive to me for 2009.