Hedge Your IRA and 401(k) With Gold Stocks

Purely from a diversification standpoint, one can make a strong argument that gold mining stocks belong in all long-term investment portfolios.

Apr 1, 2014 at 3:33PM

With broad market averages near all-time highs, and gold stocks near all-time lows, it wouldn't be a bad idea to hedge your retirement account by selling what's high to buy what's low. How much? I'll leave that up to you; just be sure the allocation is more than 1%.

The "G" word
Problem is, for investors seeking diversification, unless you go looking for gold stocks, you won't find any among your retirement account(s) -- not even 1%! I darn near guarantee it, and I'll tell you why. The vast majority of IRAs, 401(k)s, and retirement accounts are invested in mutual funds. Of the more than 7,000 equity mutual funds to choose from, only 54 (less than 0.007% of the population) specialize in precious metals.

It's pretty rare that anyone will offer to sell you a gold stock these days.

Gold doesn't have many friends
Via mutual funds, the bulk of all IRA, 401(k), and retirement assets find their way into the S&P 500. And you won't find much gold in there. Only two companies (Newmont and Freeport) of the 500 are in the business of producing gold, and their combined value is less than $50 billion.

Reflecting on the shear meagerness, and perhaps undervalued nature, of gold stocks, you could practically buy the entire gold-mining industry as represented by the S&P 500 for the price of Facebook!

Aside from picking individual stocks, and I'll highlight a few of my favorites for you below, Market Vectors Gold Miners ETF (NYSEMKT:GDX) is a liquid trading vehicle that offers diversification. But in the days of $7 trades, it's easy and inexpensive to create your own mini-mutual fund. If you plan on holding your gold miners for the medium to long term, buying seven to 12 individual stocks could be less expensive than holding GDX, which has a recurring fee of 0.53% -- possibly going up after May.

Why buy gold stocks now?
The risk-reward and timing are good. In my humble opinion, GDX bottomed back in December. If I'm right, it would be the second time in less than a decade where the index crashed by 69%, only to move dramatically higher shortly thereafter. During the crisis of 2008, GDX dropped from $56 to $17, only to shoot past $60 within two years. This time around, GDX plummeted from $65 to $20 after the excitement for gold stocks faded in 2011.

Should we expect the miners to increase by more than 100% again?
With my money, I'm voting the answer is yes. Here's a few of the names I'm invested in now. Each is worthy of owning.

Goldcorp (NYSE:GG) is one of the lowest-cost senior gold producers. Despite its role as currency throughout history, gold is also a commodity. With commodity businesses, operating costs are extremely important, because the producer has no control over price. For 2014, Goldcorp estimates it will produce between 3.0 million and 3.15 million ounces of gold at an all-in sustaining cost of $950 to $1,000 per ounce. With gold trading in a range between $1,200 and $1,400, Goldcorp should bring in more than enough cash to continue paying its dividend of $0.05 per month. At current production levels, Goldcorp's 54 million ounces of proven and probable reserves will sustain them for another decade.

No different from every other industry, the gold mining business requires great people. Rob McEwen, chief owner of McEwen Mining (NYSE:MUX), is one fine example. He's got $125 million invested in McEwen Mining and brags about not taking a salary, so it's difficult to find a more shareholder-conscious executive. Under-friended, only one analyst covers McEwen Mining, which means lots of buying power is still on the sidelines. For 2014, it's expecting to produce 37,000 ounces at $1,100. McEwen is forecasting production to double by 2015, while bringing costs down to $850, so it's got huge earnings growth potential.

Royal Gold (NASDAQ:RGLD) is a precious-metals royalty company. While traditional mining companies tend to have an all-or-nothing mentality, royalty companies spread their risks across hundreds of different projects and properties. This leaves shareholders with better odds of owning 3% of something, as opposed to 100% of nothing. Royal Gold has a diverse portfolio of assets, including 202 properties on six continents, interests on 36 producing mines, and 21 development-stage projects. As of the most recent filing, Royal Gold has $705 million in working capital, with an undrawn credit facility of more than $350 million, leaving it in a strong financial position to do more deals or increase the dividend.

The bottom line: Investors of all shapes and sizes are not diversified if gold stocks have a weighting or allocation of less than 1% of their long-term financial plan. Now is a good time for that to change.

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Daniel Cook has long positions in Goldcorp and McEwen Mining. Mini-Mutual Funds are offered through Daniel T. Cook & Partners, LLC, registered with the State of Florida as a Registered Investment Advisor. Custodial and clearing services are provided through Scottrade Advisor Services, member SIPC.

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