Solid Gold Plays For The Long Term

By Greg Sushinsky | September 30, 2009 AAA

With gold hovering at $1,000 an ounce and the gold mining stocks having run up this year already, is gold still something investors should be looking at? Freeport-McMoran (NYSE: FCX), one of the leading gold mining stocks, has seen its stock go from a skinny $15 a share to a brawny $70 in the last 52 weeks, while other gold-mining stocks have done similarly. Is this just speculation? Is it about inflation fears? Is there a place for fundamental value investors, long-term investors (if there are any left out there) in gold?

IN PICTURES: Eight Ways To Survive A Market Downturn

Digging for Profits
Gold mining stocks represent a business - a gritty, down-in-the-earth, difficult and sometimes dangerous business of extracting the precious metal out of the ground. So if a fundamental investor is interested in buying individual gold-mining stocks, he or she should begin by examining the business. Freeport's earnings are rebounding from its huge write-down and the bursting of the commodity bubble when copper prices broke down (Freeport is a significant miner of copper), and while the demand for gold and its prices heavily affects the profit margin, Freeport, like most successful gold mining companies, tries to mitigate this potential volatility as much as it can. A recent article pointed out Freeport has slashed costs and continues to be "strong, geographically diverse, with high quality assets," and suggests wisely buying Freeport in bits and pieces when the stock price falls to more attractive levels.

Digging for Assets
Another angle of Freeport is that BHP Billiton (NYSE: BHP), the massive natural resource company that tried unsuccessfully to swallow up Rio Tinto (NYSE: RTP) a couple of years ago, is sitting on $18 billion cash and has announced it is in a mood to go shopping. One of its potential acquisition targets might be Freeport, now that Freeport has streamlined its operations and is looking well set up for the future. Such a move adding huge gold and copper resources for Billiton would make sense, as it is involved in everything from copper to diamonds to metallurgical coal, so it is no stranger to handling a diversified natural resource portfolio already.

Gold as a Long-Term Investment
In the investment world, there are few topics that elicit such strong emotion as gold. In a recent article on gold on, it was pointed out that gold has a value beyond inflation monitoring or the speculation play by traders looking for another investment for diversification. The inflation factor, though even that is disputed, still has a meaningful long-term correlation, even if some money managers feel the metal is "the next bubble."

On another level, worry by China about all the U.S. dollars they are holding is also worth noting, as this is not the merely phenomenon of an individual investor buying gold coins and stuffing them in his mattress. But the correlations to inflation and the investment diversification gold provides, and its value as a hard asset, despite gold haters insisting otherwise, are historically still in place.

Gold for Individual Investors
ETFs, coins, trading gold futures and, of course, individual mining stocks are all ways to play gold. Other gold mining stocks, such as Newmont Mining (NYSE: NEM), Gold Fields (NYSE: GFI), Barrick Gold (NYSE: ABX) and Freeport McMoran, are worth looking at. The mining and metal businesses require resilient operators that are used to dealing with volatility in commodity prices and operations. Newmont, which had a rockslide in an Indonesian mine recently, is still on target for robust production. Barrick, which is the number one gold producer, completed a $625 million sale of its silver production, which provides cash to deploy elsewhere in its business. And while forward sales may dampen future profits slightly, these are also classic hedges against prices dropping, too. Gold Fields is one of the stocks cited as being bought by one of the most highly regarded professional investors, John Paulson, whose actions speak emphatically of his bullishness on gold stocks.

Beyond Bugs and Bears
If you can go beyond the emotion of the gold bugs and bears - and you should when evaluating gold - and are evaluating the gold mining stocks as investments, you would find that there is long-term fundamental value hidden behind the screaming headlines, the volatility and the overreactions that characterize the noise surrounding this symbolically powerful metal. Once this noise is stripped away, Freeport and the other miners are still solid businesses and are long-term investments that you might want to consider when their stock prices correct to more attractive buying levels. (To learn more, see Getting Into The Gold Market.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus
Related Analysis
  1. Profit From This Multi-Billionaire's Bet On An Unloved Commodity

    Profit From This Multi-Billionaire's Bet On An Unloved Commodity

  2. This Multi-Billionaire Just Invested $25 Million In This Unloved Commodity

    This Multi-Billionaire Just Invested $25 Million In This Unloved Commodity

  3. 4 Stocks Unveiled On Goldman’s Coveted Conviction Buy List

    4 Stocks Unveiled On Goldman’s Coveted Conviction Buy List

  4. Industrial Metals on the Mend - Industry Outlook
    Stock Analysis

    Industrial Metals on the Mend - Industry Outlook

  5. Unconventional Drilling Still Has Room To Boom
    Stock Analysis

    Unconventional Drilling Still Has Room To Boom

Trading Center