Five Reasons to Go for Gold

April 09, 2009 | By: TInvestment U

by Dr. Scott Brown

As you know, I’m very bearish on gold. I’ve been in total agreement with Louis Basenese’s 12 Reasons Why You Should Short Gold and his follow-up article, A Clarification on Shorting Gold.

But we’ve been in the minority. It was early February when Louis originally made those statements, and gold was close to $923 an ounce. Things have changed since then - but not much.

Gold has been on a roller coaster, moving down, then up - to just over a $1,000. It has currently pulled back to under $880. The precious metal’s performance, not to mention its disconnection to the markets, has baffled seasoned experts and analysts alike.

For a market in crisis, we haven’t seen gold skyrocket like many would have expected.

Because regardless of the current price of gold moving up or down a few hundred dollars, there are four easy ways you can profit from gold right now. So I’m going to shock many of my bearish brethren and suggest not just why you should invest in gold right now, but how to do it through gold mining stocks called prospect generators.

5 Reasons Why Gold’s still a Buy

There are a number of reasons why I’m bearish on gold. But after eighteen solid reasons from Lou, I don’t feel the need to belabor the point. However, I will say that gold is still on the historically high end of its range and that its value is more dependent upon its commodity position than its status as a currency.

But even though I’m bearish, it doesn’t mean that I don’t believe gold shouldn’t part of a diversified portfolio.

As part of our Asset Allocation Model, we hold 5% of our portfolios in precious metals. This can cause more than a bit of “discussion” when readers question why we can recommend buying gold and selling gold at the same time.

Almost two years ago, Alexander Green showed us six reasons why we should be investing in gold. Five of those are as true today as they were then.

• The U.S. dollar is weakening. That makes the precious metal, typically denominated in dollars, cheaper to buy in other currencies. (Euro-denominated investors think gold still looks cheap.) Gold traditionally rallies as the dollar falls.
• Inflation fears. Only a few months ago, Bernanke was openly fretting about the possibility of higher inflation - and saying the Fed’s bias was toward tightening rates. Yet he has cut rates dramatically to lessen the credit crunch resulting from a meltdown in mortgage-based securities. Needless to say, the Fed’s action was inflationary. And gold is an excellent inflation hedge.
• Emergence of China and India. A flourishing middle class in both emerging giants is increasing the demand for gold. (Jewelry fabrication was up more than 50% in India alone last year.) People everywhere want gold watches, gold coins and gold wedding bands.
• Supply constraints. Around the world, discovery rates are falling. Mines are being depleted and mining companies are producing lower grade base metals.
• Geopolitical instability. There are plenty of hotspots around the world today. But gold is viewed as a safe haven during times of political or economic calamity.

And while we’ve seen some slowdown in BRIC nations China and India, it’s worth pointing out that little else has changed since. But most of this is old news. We’ve known about these factors for quite some time.

It’s why I’ve saved the best for last.

Gold Mining Stocks & Gold Prices

It’s no secret that gold mining stocks rise and fall with the performance of gold. The market is pricing in the future profit potential of these companies.

It’s not uncommon to see a gold producer stock plummet in price after a significant price plunge. However, what many don’t realize is that these fluctuations have less bearing on the profit potential than you would think…

Here’s the secret.

Gold has to come down a long way to make producers unprofitable!

The cost of producing gold is about $317 an ounce. The price of gold as I write this is just under $890. That’s a profit margin of around $573 for companies with active mines - about 180% of their costs. Even if gold plummets to $700 an ounce, these companies are still making 120% of their costs.

That’s a subtle difference between profitable and really profitable - and it’s also a huge moat of safety for these companies pumping what really glitters onto the open market.

Of course there’s another way to play gold mining stocks. Though there’s more risk investing in mining companies already producing gold, it can be much more rewarding.

4 Gold Mining Stocks For A Well Diversified Portfolio

At the Investment U Conference, I was talking with commodities and resources expert Rick Rule who offered a fascinating play on gold mining stocks that aren’t the usual mining equities. These unique companies are called prospect generators.

Imagine how powerful it would be to have a group of highly trained experts out prospecting for your very own new gold or resources discovery. Imagine having the best geologists and mining engineers on your “A” team, out in the field prospecting for you.

If your crack team hits a big strike, the company share price could unexpectedly shoot up 100% to 1,000% - in a few weeks. These are exactly the situations that Rick uses to get returns of up to $1,000 for each dollar he puts in the deal.

Rick goes out and purchases a few of these “prospect generators,” then he sits back and waits. When a prospect generator has hit pay dirt in the past, Rick has suddenly had a cash gusher on his hands.

If you’re looking for gold mining stock prospect generators, take a look at:

• Esperanza Silver Corporation [CVE: EPZ]
• Riverside Resources Inc. [CVE: RRI]
• Almaden Minerals Ltd. [NYSE: AAU]
• And Cornerstone Capital Resources [CVE: CGP].

All have the potential to be your next cash gusher.

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