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"The market can remain irrational longer than you can remain solvent" - John Maynard Keynes
Saturday, January 03, 2009
Investing in Gold, Junior Miners and Certificates
In my previous post I mentioned a couple of reader questions. This answers the second question.
I want to invest in gold, I love junior miners but with such a decline in the Australian dollar are Perth mint certificates worth considering?
My answer for gold is quite similar to the answer on shorting US dollars. I think the best position is in gold mining shares. They will benefit substantially from the drop in input costs (steel, fuel, rubber etc) and gold isn't down much. The equities have been hammered and that doesn't reflect the overall value in the gold stocks. I was buying Novagold but stopped after their announcement regarding cash flow problems. As of Friday these have been resolved on awful terms to existing shareholders. However the price of Novagold, now, with their cash problems resolved, is attractive.
I like Northgate Minerals (NXG NGX.TO), Western Goldfields (WGW WGI.TO), First Magestic Silver (FR.TO) and Silver Standard Resources (SSRI). These are all producers or about to be producers. The interesting thing about gold/ silver mining is that inputs and outputs are in large part determined by global forces so currency fluctuations don't matter as much. The US miners are going to benefit from a falling USD as it will lead to some costs decreasing as compared to the price of gold. That makes them somewhat attractive even if you're buying in CAD or AUD. If you buy an Australian mine then input costs will decline with a rising AUD but so will realized gold prices.
Given that exchange rates mostly even out for gold producers and quite a few other commodity producers, the best criteria (aside from value which is obviously paramount) is politically secure reserves.
Perth Mint Gold certificates in AUD or USD bought with a 3rd currency (such as CAD) will perform identically as certificates purchase in that 3rd currency (such as CAD). The gold versus exchange rate movements all cancel each other out. ABN AMRO Markets offer something called a QUANTO certificate which takes the USD movement in gold and applies it to another currency. Primarily Euro of CHF. You could probably create such an instrument with GLD and currency options.
It is reasonable to assume that worldwide government reaction to the financial crisis will be inflationary. Warren Buffett has said as much. Buying gold mining shares selling at substantial discounts to net asset value (which is relatively easy to determine) is a good way to benefit though it's important to realize that input costs will also rise.
Disclaimer and Disclosure
Analyses are prepared from sources and data believed to be reliable, but no representation is made as to their accuracy or completeness. I am not paid by covered companies. Strategies or ideas are presented for informational purposes and should not be used as a basis for any financial decisions.
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