With Europe's debt crisis continuing to unfold, slower growth creeping across China and stalling consumer and job markets in the United States taking place, investors have once again flocked to gold. Prices for the yellow metal have rebounded from their recent lows and funds like the ETFS Physical Swiss Gold Shares (ARCA:SGOL) have seen robust inflows of new capital. However, while investors' renewed fascination for the physical precious metal remains strong, those who mine gold look to be falling into the abyss. After reaching their August 2011 highs, gold mining stocks, as measured by the AMEX Gold Bugs Index, are down nearly 40%. With budget and debt issues withstanding, some of the best gold returns may lie with those who physically dig the stuff out of the ground.
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Mining Some Profits
With the continuing pressures facing the global economic situation, investors may want to look at the gold miners. Physical gold has historically outperformed gold-mining stocks, but the ratio between the two is at an all-time high. At the beginning of May, that discount was approximately 29% below where it normally stands. The only time that mining stocks have ever traded at a greater discount to gold was the 34% seen in the October 2008 market crash. That spells a huge opportunity for investors to profit as the spread decreases and gold prices move upwards.
And those prices are expected to keep going higher. According to investment bank Morgan Stanley (NYSE:MS) "the fundamental factors that have driven the gold bull market of late remain very much in place." The sovereign debt issues facing Europe continue to weigh heavily on the markets and are having its way with global growth. At the same time, more fiscal stimulus measures from a host of nations, including the U.S. and China, are expected. Those quantitative easing programs will continue to raise inflation expectations and ultimately gold prices.
SEE: Commodity Prices And Currency Movements
Aside from the current gold positive environment, the miners are benefiting from a few other factors. First, demand remains robust amid dwindling supplies. Between 1999 and 2011, global gold mining production rose just 0.7% annually. Reserves are getting harder to find and the threat of resource nationalization is growing. Secondly, lower oil and energy costs are helping to improve margins at many of the bigger miners. Add in the newfound dividend payments and you have a recipe for some nice gains.
With the wind at the miners' backs, it might be time for investors to add exposure to the sector. Already, the factors are showing some positive results. The proxy for the sector, the Market Vectors Gold Miners ETF (ARCA:GDX) is up nearly 6.9% in June. However, it's still not too late to get golden. Here are some picks.
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While the Market Vectors fund is the largest exchange-traded fund (ETF) in the space, the new iShares MSCI Global Gold Miners Fund (ARCA:RING) undercuts on fees, while providing exposure to roughly the same group of firms. The ETF tracks 53 different miners including Peruvian miner Buenaventura Mining (NYSE:BVN) and Kinross Gold (NYSE:KGC). The fund's low expenses at 0.39% make it an ideal buy and hold investment in the sector. Likewise, closed-end fund, ASA Gold and Precious Metals (NYSE:ASA) remains an interest buy due to its 7% discount to its net asset value.
Some of the biggest gold plays could be in the largest miners as they begin to dole out some serious dividends. Both Newmont Mining
(NYSE:NEM) and Barrick (NYSE:ABX) represent two of the biggest and strongest dividend payers in the sector. Newmont's earnings are expected to hit a record $2.4 billion, or $4.85 a share, this year, while Barrick operates as an un-hedged gold producer. Meaning, the company stands to benefit from any appreciation in gold prices. Shares of the duo yield, 2.8 and 2.1%, respectively.
SEE: The Love Affair With Gold
The Bottom Line
While investors have once again returned to gold, the firms that dig the precious metal out of the ground are still languishing. However, as gold prices continue to rise, gold miners could start to shine once again. For investors, the sector remains a bargain. The previous picks, along with Eldorado Gold (NYSE:EGO), make ideal selections to play the sector.
At the time of writing, Aaron Levitt did not own shares in any of the companies mentioned in this article.