Notes From a Nervous Gold Investor

In recent weeks, we've seen some of the Fool's best and brightest take potshots at gold. My former editor Joe Magyer told you that dividend-paying stocks are way better, and Amanda Kish suggested that we're in the early stages of a bubble.

I, too, am more than a little concerned about investors' growing enthusiasm for the yellow metal. I bring a pretty different perspective from my peers, however, being that a Canadian-listed gold exploration outfit is the biggest position in my highly concentrated stock portfolio. Any gold skepticism on my part is hardly a case of sour grapes.

Let me explain why I'm not tickled by each $10 uptick.

$2,000 gold is for chumps
As discussed in my search for America's next top gold mine, Fronteer Development Group (AMEX: FRG  ) and its joint venture partner (the one I own) have what looks like a very attractive gold project at Long Canyon, in northeastern Nevada. The preliminary project economics are extremely robust, even at $700 gold.

With a cost profile like that, I have relatively little to gain from the $1,350 gold that Goldman Sachs (NYSE: GS  ) sees coming next year, let alone the $2,000 gold that my Foolish friend Chris Barker, among many others, expects sometime before this monster move is over.

Don't get me wrong: A run to $2,000 per ounce would be great for the Long Canyon project's bottom line, were the mine to start up in time to fetch such prices. But such an extreme price move would disproportionately benefit previously marginal mines, and no doubt push some seriously cumbersome projects into the development pipeline. Think NovaGold's (AMEX: NG  ) Donlin Creek joint venture with Barrick Gold (NYSE: ABX  ) in Alaska, or Seabridge Gold's (AMEX: SA  ) KSM project in British Columbia, should someone like Newmont Gold (NYSE: NEM  ) or Gold Fields (NYSE: GFI  ) decide to take that one on.

$2,000 gold would shake the fleas off of any dog of a gold project. So many new mines would get built that the current talk of "peak gold" would look downright laughable. (Then again, in a $2,000-gold world, we might not have functioning capital markets to finance these projects.) Some really dubious outfits -- see my CAPS profile for some stinkers -- are attracting crazy valuations at $1,000 gold. Imagine the madness at twice the price.

My advice for Fools interested in retaining precious metals exposure is to stick to proven, shareholder-friendly management teams advancing top-shelf projects in pro-mining jurisdictions. And stay nervous.

Fool contributor Toby Shute doesn't have a position in any company mentioned, but he does own shares of Fronteer's joint venture partner at Long Canyon. Known to some as TMFSmashy, he ranks among the top 50 Motley Fool CAPS players. You can follow his articles using Twitter or RSS. The Motley Fool has a disclosure policy.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 22, 2009, at 9:12 PM, changeagent1 wrote:

    You have got to own some gold because of the world finacial situation. I own FRG and TGB, and may buy more in Feb/Mar. Depends on 4th quarter GDP and the employment picture at that time. GDP and employment looking up, long rates will move up and stabalize the dollar, or strengthen the dollar, and put pressure on gold to move down. GDP and employment prospects not improving gold will go up after the normal end of year dollar strengthening - March.

  • Report this Comment On December 23, 2009, at 6:40 AM, XMFSinchiruna wrote:

    changeagent1,

    Actually, March is seasonally one of the worst months for gold prices. Think March 2008 for a prime example. That's not too say that seasonal factors will continue to hold sway going foward, but rather just a reminder in response to your apparently bullish expectations for March.

    Toby,

    I couldn't agree more with your last paragraph.

    A couple of things to consider, though...

    A rise to $2,000 gold could easily be accompanied by exacerbated impairment of the credit markets, with the result that even projects with vastly improved economics could have a had time coming online in any sort of a timely way. This is why I encourage investors to focus upon miners whose development pipelines are partially funded by existing or projected cash flow.

    Such a rise would certainly yield a spike in global mine production (following a lag period commensurate with the average mine development timeline), but it would not alter the facts that gold is getting increasingly hard to locate, the gold that is being found is in deposits far smaller than the gargantuan mines of South Africa and elsewhere that dominated world production for ages, I'm not sure I find the phrase "peak gold" terribly helpful either, but there has been a secular shift over the past 10-20 years in the ease with which new major deposits are being found. Since prices have been elevated for nearly ten years now, and yet we still have declining global mine supply, either the lag time associated with the phenomenon you point to is greater than we might expect, or perhaps some element of the peak gold hypothesis is a nugget of truth. :)

    Happy Holidays.

  • Report this Comment On December 24, 2009, at 9:43 AM, changeagent1 wrote:

    Best time to buy will be March with considerations of dollar expectations which should be clearer by the GDP report in January and employment in Jan, Feb, and Mar. Or, sell gold with a great economic outlook. I'm not betting on that to happen.

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