Gold Shines Brilliantly as the Ultimate Safe Haven

Although I have overheard several market observers suggesting there was "nowhere to hide" from the latest bout of acute market turmoil, that was certainly not the case. As indiscriminate selling gripped every sector of the equities space, and traditional safe havens grew increasingly unattractive, gold offered an anchor for financial markets amid the tumultuous storm.

Spot prices for gold touched another new all-time high in London trading overnight, nearing the $1,780 mark on the heels of remarkably strong momentum generated Monday after S&P's downgrade of U.S. debt. Already in August, the time-tested currency has surged nearly $160 to the overnight high, for a 10% appreciation against the U.S. dollar.

Incredibly, since July 1, the U.S. dollar has shed a full 20% of its value relative to gold. So far in 2011, the SPDR Gold Trust (NYSE: GLD  ) has gained 22% against a 5% drop for the Dow Jones Industrial Average. During Tuesday's session, gold pulled back sharply into the $1,730 range, reflecting the sort of increasing volatility I anticipate as the metal's bull market trend continues to mature.

Issuing an upgrade for gold
Effectively, S&P's downgrade of U.S. debt can be interpreted as a downgrade of the dollar; so naturally, the action served as a de facto upgrade for gold within the eyes of capital markets. Meanwhile, gathering concern over the scale of debt distress impacting Spain and Italy rendered the euro a similarly distasteful option as a destination for risk-fleeing capital. Some observers of the European crisis are calling for a massive increase in the scale of the European Financial Stability Facility, to upward of $3.5 trillion, while others have dubbed Italy "too big to save."

U.S. Treasuries remain in high demand at historically low yields, underscoring the painfully low standards investors have set for their chosen safe haven instruments. For those who understand that the trajectory for further impairment of the world's major reserve currencies remains etched in stone, gold shone brightest amid a pile of foundering alternatives as the world's ultimate safe haven.

This is precisely the resurgent role of gold that former Federal Reserve Chairman Alan Greenspan referred to when he observed in 2009 that "gold still holds reign over the financial system as the ultimate source of payment." I encourage Fools at this juncture to consider the proven perspective from gold expert Jim Sinclair, who recently opined that "gold between $1,600 and $1,764 is deciding its new and elevated role in international finance."

Back in April, when gold hovered beneath $1,500 per ounce, I discussed my own view that gold and silver would prove their immutable value as ultimate safe haven assets. Because I consider the content particularly relevant for Fools attempting to reshape their attitudes toward precious metals to account for recent developments, I offer the following passage for your due consideration:

While I do maintain a variable cash position to mitigate downside risk, I have personally selected gold and silver as my safe havens of choice. However, all one has to do is review the horrific sell-off in these metals in 2008 and 2009 to see that even these stalwarts of recent outperformance proved susceptible to the vagaries of indiscriminate selling. Given the sharply reduced attractiveness of U.S. Treasuries since that time, however, I consider a repeat performance of that degree of weakness extremely unlikely. Rather, the next time push comes to shove and investors run for the exits -- and unfortunately I do think it's just a matter of time -- I expect that gold and silver's true potential as ultimate safe haven assets in a world of tattered paper will gain overdue recognition among individual and institutional investors.

In the intervening period between the onset of the global financial crisis and the present day, we have been witness to a remarkable (yet gradual) sea change in prevailing attitudes toward gold and silver. Instead of fleeing gold en masse, as they did so notably in 2008, investors are visibly turning to gold because no other asset shines as bright in macroeconomic circumstances like those that we now face on a planetary scale.

Silver for the moment remains mired in relative weakness as gold marches higher, but it's worth noting that the iShares Silver Trust (NYSE: SLV  ) has nonetheless advanced nearly 22% year to date. Unless gold carves a deep corrective retreat very soon, Fools can expect the stretched slingshot that connects gold and silver to restore the latter's upward momentum in fairly short order. However, if the outlook for industrial silver demand were to weaken substantially, that could set up the ultimate buying opportunity for silver, because the slingshot could be stretched further still.

A pair of commodity analysts at J.P. Morgan may finally be acknowledging the enormity of this ongoing sea change themselves. Before this week, the analysts had expected gold to reach $1,800 per ounce before the end of 2011, but they have now adjusted that target to forecast gold reaching $2,500 per ounce before the end of this year! I have been tracking gold-price forecasts from the major financial institutions for several years running, and I have never witnessed an adjustment of this magnitude.

Although I have always maintained that my long-standing $2,000 price target for gold would ultimately prove laughably conservative, even this staunchly bullish Fool has a hard time envisioning $2,500 gold arriving quite that quickly. A rise that pronounced would not only imply a set of worst-case scenarios for global financial markets, but could also spawn the kind of bubbly market conditions from which gold has thus far been spared. Even as a long-term gold investor, I certainly hope those analysts are as wrong today as their colleagues have routinely been in the past.

Your margin of safety for purchasing gold
To be sure, anyone going out to purchase gold today must be cognizant of the potential for near-term price volatility in both directions. Any number of near-term scenarios could see gold snapping back abruptly, and the longer we go without a corrective retracement, the more violent such a retracement might eventually be. Nonetheless, I always encourage Fools with zero gold exposure to at least dip a toe into the water, and then look to build upon that position into relative weakness. At $2,500 gold, the difference between an entry price of $1,730 and $1,600 might seem fairly trivial.

But discerning Fools already have means at their disposal to acquire gold and silver exposure at a stiff discount to current spot prices. I refer, of course, to the range of quality precious-metal mining and exploration companies that have seen their share prices drop precipitously thus far in this equity sell-off event. Because the precious-metal equities have remained remarkably disjointed from the upward momentum of metal prices for quite some time now, I believe these equities offer entry points to investors that are akin to buying gold or silver bullion at a 25% to 50% discount to prevailing spot prices.

At $1,700 per ounce, Yamana Gold's (NYSE: AUY  ) market capitalization of $10.2 billion pales in relation to the $30.4 billion market value of the miner's gold reserves (including this gold royalty stream from Agua Rica). Although Yamana's shares have fared relatively well during the equity exodus, the stock remains a far cry from fair value. IAMGOLD (NYSE: IAG  ) carries a market capitalization of just $7.2 billion, while its hoard of 15.2 million gold ounces would sell today for $25.8 billion. After adjusting for the miner's alluring niobium assets and plentiful cash on hand, the valuation equation grows far stronger still.

I liked Eldorado Gold (NYSE: EGO  ) two years ago, when the stock sported a $5.9 billion market capitalization for 12.7 million ounces of gold in reserves. Given an 80% increase in the price of gold, a 47% expansion of gold reserves to 18.7 million ounces, and the formulation of the industry's leading production growth initiative; the 68% increase in Eldorado's market capitalization since August 2009 appears wildly inadequate.

As enticing as I consider many of the quality gold producers here, the silver miners continue to dominate my own investment interest. Hecla Mining (NYSE: HL  ) has fallen entirely too far from grace since the company revealed a costly litigation settlement, and now the stock resides deep in the Foolish bargain basement. Silvercorp Metals (NYSE: SVM  ) has shed nearly 50% from a 2011 peak recorded in April, and likewise rings this Fool's bargain detector.

With gold and silver producers like those listed above available at valuations that might begin to look appropriate at significantly lower prices for the respective metals, I continue to wait patiently for the equity component of the precious metals complex to transit through its own powerful sea change. For those who may be nervous about delving into the space at these seemingly lofty heights, I recommend the quality miners for the built-in margin of safety they provide against potential near-term price volatility.

Fool contributor Christopher Barker can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Eldorado Gold, Hecla Mining, IAMGOLD, Silvercorp Metals, and Yamana Gold. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (55)

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 August 09, 2011, at 3:16 PM, NOTvuffett wrote:

    the gold bugs are looking like the smart guys now, lol

  • Report this Comment On August 09, 2011, at 4:04 PM, XMFSinchiruna wrote:

    Although I continue to rebuke the disparaging moniker "gold bug", and all the unfortunate stereotyping and dismissive ridicule that typically accompanies the term, I thank you for acknowledging that most long-term gold investors saw these sorts of conditions coming years in advance by connecting the dots between the severity of our predicament, the knee-jerk fiscal and monetary responses to follow, and the full suite of unavoidable consequences thereto.

    Consider this excerpt from an article I wrote in 2009:

    http://www.fool.com/investing/general/2009/12/30/the-best-st...

    "Speaking of lunacy, and in the interest of intelligent discourse, could we consider burying the term "gold bug" once and for all as we approach the new year? I refute the label largely because of the illogical and derogatory associations that it conjures. From my background in anthropology, I know that prevailing attitudes are fluid over time, and my calls for $2,000 gold and $50 silver are no longer met with the same degree of dismissive incredulity as they were when I issued the very same projections back in 2007."

  • Report this Comment On August 10, 2011, at 11:04 AM, paddlinfaster wrote:

    I asked this under your previous article but did not receive a reply (think I was too late to comment) so I need to ask again -

    Can you explain why the gold mining stocks have either been flat or gone down this year while gold itself has continued on its march upward?

    I'm not invested in individual gold miners but in the USAGX precious metals mutual fund (since Fall 2008) & it did great in 2009 & 2010 but is slightly down this year. It seems the mining STOCKS follow the stock market movement more than the price of gold & I don't really understand why.

    thanks

  • Report this Comment On August 10, 2011, at 11:16 AM, XMFSinchiruna wrote:

    paddlinfaster,

    There's no short answer to your question, but let me try to touch upon a few of the basics. In part, you are absolutely correct that gold mining stocks routinely find themselves subject to broader equity flows, and that becomes particularly apparent during market events like the indiscriminate selling we witnessed in recent days.

    Another factor is that gold is just now beginning to gain traction in terms of reasserting a its role in financial markets. As investors have trickled into gold over recent years, the clear emphasis has been on bullion exposure, so capital flows into gold have been skewed toward GLD and similar instruments rather than gold. Gold stocks, although they have performed acceptably on the whole, have generally not succeeded in matching or surpassing gold's price performance. I maintain that will change very shortly, and we will see a period where gold miners significantly outperform the price performance of bullion as cash margins expand wildly and quality operatorsd increase production into the strength.

    In other words, stay tuned. The best days for gold mining stocks are yet to come, and most of them present incredible valuations at the moment.

  • Report this Comment On August 11, 2011, at 11:27 PM, Matt1344 wrote:

    Hi paddlinfaster,

    I'll add to Christopher's answer... I believe the threat of nationalization, increased royalty payments and or increasing taxes by governments in need of money have increased the risk of owning mining companies. Also production costs are raising, both energy and labor, we're seeing more strikes...

    Late '08 to early '09 was a good time to buy miners. One of my favorites right now is GORO which is my largest mining position. CEF is the largest position in my portfolio followed by cash and then GORO. I own shares in ~50 gold and silver miners.

    I will likely add to some of my positions and sell some in the coming months.

    Take care, Ken

  • Report this Comment On August 12, 2011, at 8:20 AM, XMFSinchiruna wrote:

    Ken, Congratulations ... that GORO chart is one of the sweetest in the industry. I've been remiss in letting that stock fall off my radar while tracking hundreds of others.

  • Report this Comment On August 12, 2011, at 4:20 PM, wantingtoretire wrote:

    Other members of Motley Fool seem intentionally resistant to recognizing the potential of precious metals. No more than 5% of your portfolio was the answer I got today during the chat session. Depending on one's time horizon, I cannot help feeling that equities, and only equities is a wise course to follow for Motley Fool at this time. I subscribe to help get a balanced view, but I am not sure I am getting that balanced view any longer....

  • Report this Comment On August 12, 2011, at 4:22 PM, wantingtoretire wrote:

    My last comment needs the following revison..

    Depending on one's time horizon, I cannot help feeling that equities, and only equities is not a wise course to follow for Motley Fool at this time.

  • Report this Comment On August 12, 2011, at 8:18 PM, bcinnz wrote:

    Hi paddlinfaster, my experience is that some miners have sold their gold production forward, and they therefore lose the upside but are secure at some price that they were happy with ealier on. It would be great if we always had complete transparency regarding the hedged postion, and at what prices theese were place

  • Report this Comment On August 14, 2011, at 5:14 PM, Matt1344 wrote:

    Hi Christopher,

    Thanks but the credit goes to EddieLuck, he brought my attention to it on the Mining and Metals board :-) I looked at it and really liked several things about it. Management had founded US Gold which they sold and then founded GORO. There is a high level of management ownership(19%); Hochschild Mining(28%) and Tocqueville(8%).

    They had and still have a commitment to paying out 1/3 of profits in dividends, which they began paying over a year ago, 1/3 to taxes, 1/3 to growth... And they don't even have a NI 43-101 filed yet. They knew the gold was there and built the mine. Hochschild looked at what they had and put up money, I took that as a recommendation so I bought some more. They've minimized dilution, only ~57M SFD and debt is listed as NIL

    Recently I've been building a position in Pretium(PVG.TO or PXZRF.PK). Bob Quartermain from SSRI is running it. Lots of gold, ~34MM oz M&I. One recent hit: 0.5m at 6,670 gpt, IIRC they had one hit around 18,000gpt(could be wrong). And they're next door to Seabridge(around 30MM oz) so maybe they team up...

    Not a recommendation just what I'm doing :-)

    While I have ~50 mining positions I do not consider myself an expert!

    Regards, Ken (78% of my holdings are in Au & Ag; Bullion and miners.)

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