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Nicholas Kitonyi
Nicholas Kitonyi
Articles (204)  | Author's Website |

With U.S. Equities Remaining Bullish, How Do You Invest in Gold?

Gold bullion investors can leverage their positions by investing in stocks

The U.S. Federal Reserve is widely expected to increase interest rates in the near future as the country’s economic prospects continue to show promise. This has been the story for the last 12 months after ending the quantitative easing program in Q3 last year.

The U.S. economy has been on a recovery trend since 2011 in the aftermath of the 2008 and 2009 global financial crises. This is illustrated by the nature in which U.S. equities have rallied over the last four years. While there have been dips and rebounds along the way, the overall trend has remained bullish to date as investors continue to be optimistic with regard to the country’s current economic condition.

Now, on the contrary, the price of gold, which in most cases relates inversely to economic prosperity, has continued to plunge after hitting an all-time high of $1,895 in 2011. The price of the yellow metal is now down 43% since September 2011, and it continues to be under pressure as investors anticipate a U.S. interest rate hike in the coming months.

The contrasting picture between the advances made by U.S. equities compared to the decline in gold price can be expressed using the two major ETFs of both markets; that is the SPDR S&P 500 ETF (SPY) and the SPDR Gold ETF (GLD).

As shown in the chart above, U.S. equity investors have experienced better returns over the last three years when compared to their counterparts in the gold market.

The SPDR S&P 500 ETF enjoyed an extended rally that seemed to hit a major turning point three months ago but has rebounded to the initial trend. On the other hand, SPDR Gold ETF has continued to plunge with no major recoveries in the last 12 months.

So how should you invest in gold now?

Despite the underwhelming performance of the yellow metal witnessed over the last few years, gold is still regarded as the safest way of investing during unpredictable economic conditions.

This explains why platforms like BitGold, a digital payments platform that allows people to securely acquire, store and spend gold with unprecedented simplicity, continues to register members. It provides free vault storage and insurance for gold customers provided by Brinks and also boasts being the cheapest service in the market. At Bitgold, gold prices are always within 1% of the actual spot price, and the provider has already acquired more than 500,000 users within the first six months of launching.

This means that people are still interested in acquiring gold bullion and holding long positions in related derivative products. Therefore, investors have to find a way of making the most of the current market condition by identifying the right instruments to use as investment vehicles.

While trading gold via various commodity trading platforms is an option, investors can also assess various stocks that have a certain exposure to gold price volatility to take short/long positions depending on valuation assessments. Ideally, most of the stocks appear to have plunged significantly over the past 12 months, thereby making them significantly attractive in terms of valuation multiples like P/B ratio.

Royal Gold (NASDAQ:RGLD) is one of the promising gold stocks in the market having plunged by nearly 50% over the last 12 months. The stock currently trades at just 1% above its tangible book value and also enjoys magnificent profitability margins.

The company boasts a gross profit margin of 85% compared to the industry average of about 42%, while its operating margin of 37% is far better than 0% for the industry. However, the company’s top line and bottom line have suffered over the last few quarters as the price of gold continued to plunge.

Currently, Royal Gold has a 12-month trailing EPS of -18 cents, or 18 cents lost per share, while quarterly revenue increased by just 7% compared to the industry average of 55% in the most recent quarter.

This stock has also experienced some buying activity from gurus in the last few months with Joel Greenblatt (Trades, Portfolio) and Julian Robertson (Trades, Portfolio) buying 18,453 and 77,500 shares, respectively. On the other hand, First Eagle Investment (Trades, Portfolio) added to the stake to bring its total holding in the company to 4.2 million shares while Mario Gabelli (Trades, Portfolio) continued to reduce his stake to 16,730 shares.

Therefore, with the price of the stock having declined since the last guru portfolio updates, it may yet be a good time to buy the stock going into next year.

Randgold Resources (NASDAQ:GOLD) is arguably the best stock to choose when it comes to investing in gold via company shares right now. This is a profit-making company with impressive operating and net profit margins.

The company currently appears significantly expensive from a P/E multiple perspective (which is 29.43x), but this could be due to its impressive performance on top line and bottom line, as well as a huge cash outlay.

Randgold has close to zero debt on its balance sheet at just $2.77 million compared to $352 million worth of operating cash flow while its net profit margin of 20% guarantees continuous generation of cash if sustained.

The company has also attracted the interest of guru investors with Mario Gabelli (Trades, Portfolio) currently holding 28,880 shares. On the other hand, John Paulson (Trades, Portfolio) holds 679,967 while Arnold Van Den Berg (Trades, Portfolio) has 243,868 shares. First Eagle Investment (Trades, Portfolio) is also a major holder with 791,917 shares, or $47.9 million worth of shares based on the current price of $60.6 per share.

Randgold offers financial stability for investors looking for stocks that can weather the storm as gold price continues to plunge.

Eldorado Gold (NYSE:EGO) is another stock that those interested in gold stocks would want to look at. It is down nearly 60% over the last 12 months as it continues to struggle to deliver on both the top and bottom lines.

However, the stock currently trades at just 43% of its tangible book value, which means that investors should look at it as either a value trap or a significantly undervalued stock. The company currently generates revenues of just under $1 billion but still remains unprofitable.

In the most recent quarter, revenue fell by 19.7%, but the company still continues to enjoy positive operating margin, which is good from an operational perspective.

In the last few months, hedge funds have been reducing their holdings in the company, which may be a good signal to short the stock for now, but given the company’s discounted pricing as per P/B ratio, some investors may want to consider taking a cautious long position.

Alternatively, investors can also consider investing in one of the world’s largest gold mining stocks, Barrick Gold (NYSE:ABX) or shorting one of the worst performers New Gold (NGD). Barrick Gold provides significant financial stability given its massive size and $2.47 billion in operating cash flow while New Gold’s operating and net profit margins of about -78% and -88% suggest that taking a short position will most likely pay off.

The company currently trades at 52% of its tangible book value compared to Barrick Gold’s 85%, but when you assess those margins there is little hope for an uptrend for New Gold, especially given the current gold price trend that appears to be on a downward run.

Conclusion

The continuous plunge in gold price appears to be making things a little tricky for gold investors. There are a few options out there which they can use to complement their gold bullion investments.

Stocks and other gold-related derivatives can be used to capitalize on both long and short positions as the price of the yellow metal continues to fluctuate while maintaining a short-term downward trend. However, gold is still the best store of value especially given the unpredictability of global economic conditions.

The U.S. appears to be playing a crucial role with its interest rate hike campaign, but any more delays could play in the hands of the yellow metal as uncertainty continues to build amongst investors.

Disclosure: I have no position in any stock/commodity mentioned.

About the author:

Nicholas Kitonyi
Nicholas is a financial analyst with extensive experience in investment research and stock market analysis. His analysis has been featured on research sites like Seeking Alpha and Benzinga.

Nicholas has solid knowledge of both U.S. and European markets. His investment style is focused on undervalued plays and growth stocks. As a trader, Nicholas classifies himself as a swing trader and likes to trade GBP/USD, gold and FTSE 100, among other liquid instruments.

Visit Nicholas Kitonyi's Website


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Comments

geoffrey.lennon
Geoffrey.lennon - 1 year ago    Report SPAM

"On the other hand, SPDR Gold ETF has continued to plunge with no major recoveries in the last 12 months."

I can't say I'm surprised about GLD sinking in particular. Paper gold GLD claims to be fully backed by physical gold bullion but yet it refuses to give retail investors the right to redeem for any of these ‘claimed’ gold bullion. This fact alone would mean GLD shares are nothing more than paper at the end of the day. Furthermore, GLD’s prospectus is chalk full of weasel clauses and legal loopholes that allows the fund to get away without the full physical gold backing. One good example of this is the clause that states GLD has no right to audit subcustodial gold holdings. To this day, I have not heard of a single good reason for the existence of this audit loophole. I’ve also verified the following to be true and welcome everyone else to do so:

"Did anyone try calling the GLD hotline at (866) 320 4053 in search of numerical details on GLD's insurance? The prospectus vaguely states "The Custodian maintains insurance with regard to its business on such terms and conditions as it considers appropriate which does not cover the full amount of gold held in custody." When I asked about how much of the gold was insured, the representative proceeded act as if he didn't know and said they were just the "marketing agent" for GLD. What kind of marketing agent would not know such basic information about a product they are marketing? It seems like they are deliberately hiding information from investors.

I remember there was a well documented visit by CNBC's Bob Pisani to GLD's gold vault. This visit was organized by GLD's management to prove the existence of GLD's gold but the gold bar held up by Mr. Pisani had the serial number ZJ6752 which did not appear on the most recent bar list at that time. It was later discovered that this "GLD" bar was actually owned by ETF Securities.

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