Hardcore gold investors made a grand killing over the past few years as spot prices more than doubled. But since the beginning of 2011, hanging on to gold has meant stomaching some disturbing downs. Here's this year's price chart of an exchange traded fund designed to track the price of gold.
Mixed signals from currency markets and inflation indices are making it harder than usual to predict the direction of gold prices. Tentative dollar strengthening has sent gold prices down. But higher interest rates, which appear to be inevitable soon, usually send gold prices higher.
Even the most successful investors in the world can't agree on how to interpret this. John Paulson is buying gold. George Soros, selling. Those who prefer fewer Rolaids with their investment portfolios are shying away from buying gold bars at today's prices, or even exchange-traded funds for gold. But there is a better way to invest in gold now. Just watch Soros. Soros is selling his gold but buying miners. The trade gives him exposure to rising gold prices but some protections from losses if the price of gold declines.
Unlike the commodity or gold index funds, miners offer investors cash and assets that make their shares more valuable than the price of their product alone. They can raise profits by cutting costs, finding ways to get more gold out of their mines or buying competitors. They can offset gold price declines by mining other ores, investing in other products, or hedging fuel and currency. YCharts Pro finds the shares of two gold mining companies attractive now: Barrick Gold Corp. (NYSE: ABX ) and Newmont Mining Corp. (NYSE: NEM ) .
Toronto-based Barrick is the largest gold mining company in the world. It has gold mines in North and South America, Africa and Australia, and it also mines silver and copper. Newmont also is one of the world's biggest gold miners. Based in Denver, the company has mines mainly in the U.S., Peru, Indonesia, Ghana and Canada. North and South America, Southeast Asia and West Africa. It also is involved in several mining joint ventures. Both companies have seen big sales gains as the price of gold went higher. But Barrick's gains have been much bigger because of acquisitions.
It's surely one of the reasons Soros picked Barrick over Newmont when he went looking for miners. Barrick management plans substantial growth through acquisitions, and in April, the company announced plans to purchase copper producer Equinox Mineral's Ltd.
But Newmont does at least as well as Barrick in turning its revenue gains into profits. (For purposes here, we can ignore the big dip for each company; they reflect changes in hedging strategies that both companies adopted at different times.)
Fundamentally, the companies look remarkably similar. They both have very low debt, plenty of cash, and roughly equal gross profit margins. They both offer a modest dividend. The shares of both companies are cheaper today than they have been in 10 years. But Barrick's investments in silver and copper are a comforting diversification at a time of gold price uncertainty. And unlike Newmont, Barrick has managed to turn its strong sales and earnings growth into impressive gains for its shareholders.
A drop in gold prices certainly would be a hard hit to Barrick. But with diversification and an acquisitive nature, the company can still offer investors growth. That's something you can't get from a rock.
Dee Gill is an editor for the YCharts Pro Investor Service.