Gold is a proven hedge against inflation; it’s also a hedge against crises. During the Great Recession of 2008-09, the worst economic downturn since the 1930s, gold prices rallied from $840 per ounce at the end of 2007 to over $1,200 by the end of 2009, even though inflation over this period remained subdued.
A sharp correction in gold prices in late 2011 was partly driven by financial institutions selling their gold to raise cash. However, the European Central Bank’s long-term refinancing operation — low-cost, three-year loans to European banks — eased financial institutions’ need to sell gold.
Uncertainty surrounding the upcoming US presidential election, fading seasonal tailwinds and a still-evolving EU debt crisis will limit US economic growth. There’s a strong chance the Federal Reserve will announce a third round of quantitative easing in the second half of 2012; the past two rounds of Fed money printing have proved bullish for gold.
All investors should hold at least a portion of their assets in gold, either in physical gold or the SPDR Gold Trust Shares (GLD) exchange-traded fund.
Investors also shouldn’t ignore gold mining stocks. The Philadelphia Gold & Silver Index, which tracks the performance of large-capitalization gold mining names, trades near an all-time low relative to the price of gold bullion. In addition, mining stocks fetch an average of less than three times sales, a discount to their long-term average of five times. This is an excellent time to accumulate positions in gold mining firms with the potential to grow their output over the next few years.
Freeport-McMoRan Copper & Gold (FCX) is that rare mining stock which pays a generous and rising dividend. Most encouraging, the 25 percent increase in the May 1 payment—as with the 66 percent boost the year before and the 100 percent hike the year before—reflect the company’s relentless and successful expansion as much as a robust price environment.
First-quarter output of gold, copper and molybdenum—a key element for high-test steel—was somewhat lower than a year ago. This shortfall stemmed from the temporary suspension of operations at the Grasberg mine in Indonesia, which cut copper production by approximately 80 million pounds and gold by 125,000 ounces.
Without this disruption, the company’s metal production would have held steady with year-ago levels. The company is still on target to boost annual copper production by 25 percent over the next three to four years and boasts one of the most efficient cost structures among its peers.
Successful mine development prompted management to lift the first-quarter dividend by 25 percent, despite near-term softening in the market for its primary products. The company’s realized selling price for the red metal during the quarter was $3.82, roughly 11 percent below last year’s take. Realized prices for molybdenum were 15 percent lower. Gold prices surged 28 percent from year-ago levels, though the price of this precious metal has retreated from the $1,694 per ounce it fetched during the first quarter.
Looking ahead to the rest of 2012, the company expects production costs to rise as it pushes ahead with new development and restores output from its Grasberg mine to normal levels. That’s induced management to reduce its cash flow forecast to $4.2 billion, while increasing expected capital spending to $4.3 billion for the year.
Increasing costs, coupled with investor uncertainty about China’s economy, have pushed Freeport shares down to a new trading range in the upper 30s, from a level in the upper 40s earlier this year and a high of nearly 60 in late 2010.
These price fluctuations are normal for a company that produces natural resources. However, investors have the opportunity to buy the world’s fastest-growing major resource company with diminishing political risk and a strong balance sheet at its lowest price since the 2008-09 recession.
The stock provides income, growth and a potential hedge against inflation.