Gold Rush or Gold Bust?

Fact: The spot gold price, the price you pay if you want immediate delivery, reached $462.70 an ounce today. It has not been that high since June 1988 -- when Ronald Reagan was president and the Netherlands was ready to become the second country to connect to the Internet.

Analysis: As always, there are optimists and pessimists. Let's run the gold news past one of each.

Optimist: "Gold is at a 17-year high!"

Pessimist: "After 17 years, what do you have? A zero percentage move. Fantastic! That's the best example of dead money I've seen."

Optimist: "The NYSE's list of biggest percentage gainers today is loaded with gold stocks. Harmony Gold (NYSE: HMY  ) , Gold Fields (NYSE: GFI  ) , and Placer Dome (NYSE: PDG  ) . Even silver- and gold-miner Hecla (NYSE: HL  ) is on the list."

Pessimist: "Must be a stock pickers' market. I notice Yamana Gold (AMEX: AUY  ) was one of the biggest percentage losers on the AMEX. What's so good about gold?"

Optimist: "Central bank sales are dwindling. In fact, the rumor is that Argentina's central bank might increase gold reserves to serve as an inflation hedge and to protect against a financial crisis. Then there is Hurricane Katrina and the possibility that its impact will ignite inflation in the U.S. again. Oh, and don't forget that the high price of oil might plunge the U.S. into a recession."

Pessimist: "And you call me a pessimist?"

Optimist: "We'll get through it! Just think of your wife's jewelry as the investment."

More analysis: Gold bottomed out at $254.20 an ounce in 1999. While today's $462.70 sounds like a meteoric rise, it works out to slightly more than 10% a year since then.

To understand why gold-mining companies have soared, consider this: Last quarter, Newmont Mining (NYSE: NEM  ) , a high-quality gold-mining stock, produced gold at a cost of $244 an ounce. At 1999's low, that would have produced a $27.20 profit per ounce (using cost of production in 1999 of $227). At today's price, with the production cost of $244, that produces a $218.70 profit. No wonder Newmont's stock is 2.3 times higher than it was six years ago today.

The current gold price is fueling strong free cash flow and high expectations for miners. For example, Barrick (NYSE: ABX  ) has annual trailing free cash flow of $326.6 million, according to Capital IQ. Its net debt (total debt minus cash) of $640 million could be wiped out in two years if gold prices held around $30 an ounce below where they are today. For a capital-intensive industry like mining, it's always best to have a strong balance sheet in case commodity prices head south.

There is no guarantee that gold prices will remain at current levels (or higher), or that miners will use their free cash to reduce debt. But these companies are attracting attention because they are, at today's prices, cash-generating machines. So maybe its time to resurrect a gold rush after all.

More Golden Books, er, articles:

Are you looking for great companies selling at prices less than their intrinsic value? Let Motley Fool Inside Value newsletter bring you two selections to consider each month, plus past picks, a community of like-minded value investors, and much, much more. Try a free trial subscription today.

Fool contributor W.D. Crotty does not own shares in any of the companies mentioned. Clickhereto see the Fool's disclosure policy.


Read/Post Comments (1) | Recommend This Article (0)

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.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 496252, ~/Articles/ArticleHandler.aspx, 8/30/2014 12:38:12 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 15 hours ago Sponsored by:
DOW 17,098.45 18.88 0.11%
S&P 500 2,003.37 6.63 0.33%
NASD 4,580.27 22.58 0.50%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

8/29/2014 4:00 PM
ABX $18.39 Up +0.17 +0.93%
Barrick Gold Corp… CAPS Rating: ***
AUY $8.50 Up +0.15 +1.80%
Yamana Gold, Inc.… CAPS Rating: ***
GFI $4.84 Up +0.21 +4.54%
Gold Fields Limite… CAPS Rating: **
HL $3.27 Up +0.03 +0.93%
Hecla Mining Compa… CAPS Rating: ****
HMY $3.04 Down +0.00 +0.00%
Harmony Gold Minin… CAPS Rating: **
NEM $27.09 Up +0.23 +0.86%
Newmont Mining Cor… CAPS Rating: ***

Advertisement