Hot Gold Stocks

Gold on a record-breaking roll

Gold prices have reached a new record high and are expected to top $2,000 U.S. an ounce later this year amid the recent flurry of anemic U.S. economic data and new fears that Europe’s debt crisis will spread.

“It’s pretty amazing. Gold is really the ‘it’ thing,” said mining analyst Barry Allan of Mackie Research Capital in Toronto.

“I remember not long ago when it hit $500 and people were cheering about that,” he said.

After a steady climb from $1,495 on July 4, bullion shot up another $23.30 U.S. an ounce to close at $1,585.20 in New York Wednesday. And the gold bugs say it’s just a preview of more good times to come for the often fickle precious metal.

The last record high of $1,577.40 was set on May 2 before an abrupt pullback in precious metals that dragged gold below the key $1,500 benchmark.

But bullion is bouncing back again, with the next milestone of $2,000 widely predicted sometime this year as the U.S. dollar and the euro continue to slide and global economies hit the skids.

Meanwhile investors have taken a shine to gold in the form of jewelry and exchange-traded funds (ETFs) as a hedge against world-wide economic instability.

“It’s hit a new high every year for the last 10 years. Gold has become the default currency,” said John Ing, president of Maison Placements Canada Inc. in Toronto.

“There’s just a lack of clarity or faith in resolving the debt trap on both sides of the ocean,” noted the veteran gold bug.

The average price of the glamorous metal – traditionally the safe haven investment amid times of economic uncertainty – will reach “$2,011 in 2011,” predicts Ing.

Gold investment maverick Rob McEwen, chief executive of U.S. Gold Corp., goes much further, saying it will hit $5,000 by the end of the ongoing red hot resources cycle.

While the U.S. dollar plays a key role in the fluctuating gold price – the two tend to move in opposite directions with bullion priced in U.S. currency – monetary policy has the greatest impact on gold, analysts say.

After a golden decade that has seen the metal price jump more than 600 per cent from a low of $252 U.S. in 1999, speculators are still buying gold faster than the world’s biggest producers can crank it out.

It means established miners must find new discoveries – which is getting harder every year – or acquire existing mines owned by smaller companies to stay afloat.

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So, the price of gold is going up, and so are gold stocks. There really isn’t much money to be made in this market except for speculating in gold shares. It’s the industry with the best near- and medium-term fundamentals as far as I’m concerned.

The big move in gold has already taken place and equity investors should already have some exposure to this important commodity. The thing about the global economy is that we’re in a long period of slow growth with inflationary pressures. It’s the best of both worlds for gold. Add in sovereign debt worries (politicians would rather print money and create inflation than cut programs) and the emerging strength of BRIC economies, and it’s quite arguable that the spot price of gold could hit $2,000 an ounce.

There are actually very few investment-grade, large-cap gold companies. Only a few pay a dividend and, of those, yields aren’t really more than one percent. Most of the gold miners out there would compare to medium- or small-cap companies and, because of the volatility inherent in commodities, should be considered speculative equity securities. Regardless, I wouldn’t have an equity portfolio that didn’t have some exposure to gold, especially giving current economic fundamentals.

Like most things now, investors can consider a gold mutual fund or exchange-traded fund (ETF). There’s even publicly traded companies the sole purchase of which is to own and secure large numbers of gold bars. For the most part, all stocks related to gold trade commensurately with the spot price of the commodity—and there lies the greatest investment risk for a gold investor.

There was a bandwagon effect taking place in precious metals earlier in the year. Institutional investors piled into gold, silver and copper and then jumped into agricultural commodities. Right now, large money managers are desperately hoping that second-quarter earnings and visibility will be strong enough to provide a catalyst to buy stocks. Investing in gold isn’t on their minds to any great degree. But, the price of gold is creeping higher. If it ticks past $1,650, then I think we’ll have a new rush on our hands. Percentage-wise, this price isn’t far away at all. It certainly is a great time to be in the gold mining business. It’s an industry that’s flush with cash.

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