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It's time to get smart about gold.
Given the well-documented risks for further devaluation of the U.S. dollar going forward, I submit that some exposure to precious metals must be considered a prudent component of any well-balanced asset portfolio.
Which form that exposure takes -- whether it's a bullion instrument like SPDR Gold Shares (NYSE: GLD ) , a single mining equity ETF like the Market Vectors Gold Miners ETF (NYSE: GDX ) , or a more customized basket of equity holdings -- is a decision all investors must make for themselves.
Likewise, the scale of one's allocation to gold and/or silver must be tailored to an individual's own degree of confidence in the long-term upward trajectory for precious metals.
I have reason to be hopeful about this, since 96% of respondents to a recent Motley Poll agreed that "Gold is money, and paper money is more impaired than ever before. Gold will continue to shine." For those intent upon scrutinizing the global macroeconomic landscape, and how it relates to the outlook for gold and silver prices, I offer the array of articles hyperlinked above and below.
The Fool community has been actively discussing gold and silver for several years running, and members are well-versed on the topic. Diverse perspectives are not only present, but celebrated. Newcomers are strongly encouraged to approach the Motley Fool CAPS community through the CAPS blogs with any questions or ideas they may have about this sector.
Where we stand today
Following an 18-month corrective phase, gold entered a new chapter in its multi-year bull market when prices finally broke through key resistance at the previous nominal high of $1,033 per ounce in early October 2009. The metal rocketed to a fresh high above $1,220 just two months later, prompting this Fool to raise some cash by parting with some shares of highfliers like IAMGOLD (NYSE: IAG ) for a likely corrective pause. Thereafter, a counter-cyclical dollar rally triggered a reversal that so far has shaved more than 10% from both gold and silver prices, and a prompt retracement of 33% from IAMGOLD shares.
With all the attention paid to junior miners of late, Fools may be surprised to discover that the Market Vectors Gold Miners ETF has actually fallen slightly further than its junior miner counterpart since this reversal took hold on Dec. 2. A strong relative showing by junior New Gold (AMEX: NGD ) -- amid near-certainty that the El Morro project in Chile will be fast-tracked toward production by one of two determined major miners -- has etched a powerful counterpoint to weakness among fellow juniors, like the 35% collapse in shares of one of my favorite primary silver miners: Coeur d'Alene Mines (NYSE: CDE ) .
Although I believe that multiple mining names are resplendent with golden prospects, the mid-tier and major miners in particular have fallen sufficiently from recent heights to warrant reinvigorated buying interest. With the possibility for near-term weakness notwithstanding (if metal prices continue to slump), shares of major miner Goldcorp (NYSE: GG ) offer superb growth prospects following a pair of pending strategic acquisitions. Fools already know my top choice for silver.
Yamana simply gleams
However, weighing the combined criteria of deep value, long-term production growth potential, and a high-quality operation with favorable ore and cost metrics, Yamana Gold (NYSE: AUY ) takes the nod from this Fool as the best overall selection within the gold mining sector at this particular stage in the bull market.
With combined proven and probable reserves of gold, silver, and copper in the ground carrying a present market value of about $62 billion, Yamana's modest $8.19 billion enterprise value is astonishing by comparison.
Incredibly, Monday's closing share price of $10.53 was first achieved by the stock in April of 2006! Although Yamana's share count has ballooned by 283% over the intervening period, massive value was generated by a corresponding 272% increase in gold reserves alongside an 80% surge in gold prices. More amazing still, the period in question also witnessed more than a tenfold increase in annual production -- from just 112,506 ounces in 2005 to 1.2 million GEOs in 2009. As if on cue, Yamana announced a positive construction decision for the Ernesto/Pau-a-pique project Tuesday morning, as well as an optimized mine plan for the exciting Agua Rica copper/gold project in Argentina.
These shares have appreciated 169% since I proclaimed that "Yawanna Have Yamana" back in October of 2008, but still remain 47% below their all-time high. Either Yamana Gold was among the most overvalued stocks in the equity universe back in 2006, or it's a screaming value today.
You be the judge: Vote in our Motley Poll, and share your thoughts about this struggling mining stock in the comments section below.