How To Play $3,000 Gold

By Aaron Levitt | November 13, 2011 AAA

The investing world is full of forecasts. Every analyst, investment bank and brokerage house sets forth their opinion to the investing world and tries to gauge the future. In the gold sector, it's no different. Predictions of $5,000 or even $10,000-an-ounce gold are now hitting the press wires. While most of these predictions may turn out to be "too good to be true" (remember Dow 36,000?), it does pay to follow the advice of a few sound managers or analysts who have proven success. One such manager, with a history of outperformance, recently offered his take on the gold sector.
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Large Rise in 2012
Guiding his fund to a 26% annual return over the last 10 years, John Hathaway certainly knows his way around the gold markets. The Tocqueville Gold (TGLDX) features a Morningstar four-star rating and has been one of the better performing precious metals funds since its inception in 1998. Hathaway's latest missive on where gold prices could hit in 2012 is enough to make any gold bug happy.

The fund manager believes that continued efforts to stimulate souring economies in both Europe and the United States will push gold prices closer to $3,000 an ounce by the end of 2012. Currently, gold sits around the $1,700 mark. In his report, Hathaway said, "The market reaction to this financial crisis on both sides of the Atlantic is a necessary, but painful, prologue for gold to reach new highs, which we believe could probably be well above $2000 and maybe even $3000." Ultimately, the fund manager believes that more monetary and fiscal stimulus by various governments will equal printing money. The resulting inflation coupled with "breakdown of confidence in paper currencies linked only to political agendas," will serve to support higher gold prices in the future. (For related reading on gold, see The Gold Standard Revisited.)

Hathaway also cites that there is only about $2 trillion worth of investment in gold, or approximately 1% of all global financial assets. This, plus the recent divergence in gold prices versus the stocks of miners, makes those firms that dig the stuff out of the ground increasingly compelling.

Playing Hathaway's Bullish Stance
With a solid track record in the sector, investor's may want to take Hathaway's advice and add some gold exposure to their portfolio. Aside from adding his fund to a portfolio, the SPDR Gold Shares (NYSE:GLD) is still the largest and easiest way to add direct exposure to rising gold prices. However, as the manager says, "If one believes that the current gold price is sustainable, the historically high discount between the shares and the metal represents a compelling opportunity," then a bet on the miners could be in order.

Tocqueville Gold's largest miner holding is in Goldcorp (NYSE:GG). The firm continues to offer one of the lowest costs of production for the precious metal and higher gold prices have translated into higher earnings. The company reported an 88% increase in earnings for the third quarter and recently increased its monthly dividend. Goldcorp currently yields 0.8%.

Higher gold prices should benefit investors in Newmont Mining (NYSE:NEM). Back in April, the firm reported that it would link its dividends to the price of gold to attract investors. Newmont's current yield sits around 2%, but the miner has raised its payment during the last quarters. As higher gold prices persist, investors could be rewarded with continued higher payouts. Additionally, both Barrick Gold (NYSE:ABX) and Freeport-McMoRan (NYSE:FCX) offer strong yields. (For related reading on gold, see Getting Into The Gold Market.)

The Bottom Line
For investors, honing in on top managers or analysts' forecasts could lead to major profits. In the gold sector, John Hathaway has guided his fund to outstanding results over the last few years. His latest report gives insight into his predictions of $3,000 an ounce gold. Betting on physical prices via the ETFS Physical Swiss Gold Shares (Nasdaq:SGOL) or the previous mining stocks, could be great investments.

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At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.

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