Inside Wall Street: Yes, There's Still Gold in These Gold-Mining Stocks

Gold bullion
Gold bullion

There's no denying that gold has caught the fancy of most investors, dazzled by the tantalizing ascent of the precious metal's price to record highs. And the gold bugs have become ever more serious about gold's skyrocketing intrinsic value.

If you think it's too late to jump on the gold bandwagon, you'll get a lot of opinion to the contrary, even though on Tuesday, Oct. 19, gold slipped a bit because of the rally in the U.S. dollar. The greenback surged due in part to China's move to boost interest rates to tamp down rising inflation and curb speculative investments in the domestic economy.

"The China interest rate story caused some selling in gold, but it still remains above its bullish trend line," says James DiGeorgia, editor of the Gold and Energy Advisor, who's regarded as one of the industry's top gold gurus. He notes that gold's climb is tied to the value of the U.S. dollar and not to the rate of inflation in the U.S. And of course, the value of the dollar, he adds, is linked to the full faith and credit of the U.S. government.

"Not Thinking Clearly"

"It's the level of faith and credit of the U.S. government that's become a growing problem in the past 10 years, as gold has steadily risen," says DiGeorgia. Last year, when the precious metal was selling at $1,200 an ounce, he predicted that it would jump to $1,400 to $1,500 this year. On Oct. 14, the gold December future's contract closed at a record high of $1,377.

"Anyone who questions the wisdom of owning gold is not thinking clearly," says Charles Laloggia, investment and research consultant, who argues that the only thing that will stop gold from continuing to rise relative to the dollar is when the Federal Reserve Board decides to raise short-term interest rates to more historically reasonable levels. "That's not going to happen anytime soon," he predicts.

Even the big Wall Street houses are bullish on gold. ""We expect the price of gold to continue to climb," says Goldman Sachs Global Investment Research Division in a note to investors. So, it has raised its 12-month price forecast to $1,650 an ounce. "With the prospects for another round of quantitative easing in the U.S. increasingly strong, U.S. real interest rates continue to fall," notes Goldman. The Fed's "return to quantitative easing will likely be a strong catalyst to drive gold prices higher, and we expect the gold price rally to continue until U.S. monetary policy begins to tighten," argues Goldman.

Miners That Are Missing Out

One interesting aspect of the gold rush is that shares of gold-mining companies haven't skyrocketed as the price of physical gold has. They have, of course, climbed, but evidently, investors have yet to focus on gold-mining shares. That's led some investment pros to focus on mining stocks that they believe will participate more fully in gold's heady ascent.

"We still see value in the major gold miners," says Jared M. Levin, portfolio manager at investment firm A.R. Schmeidler, which has been a bull on gold and other commodities for the past several years. He believes these stocks have bright prospects for catching up with gold's climb. Schmeidler's top-three gold-mining picks are:

  • Barrick Gold (ABX), the world's largest gold-mining company in production and reserves, currently trading at $45.46 a share, close to its 52-week high of $48.99

  • Newmont (NEM), one of the world's largest producers of gold, as well as copper, currently trading at $59.93 a share, down from its 52-week high of $65.50

  • New Gold (NGD), which explores and develops gold properties in the U.S., Australia and Mexico, trades at $6.46 a share, down from its 52-week high of $7.53 a share.

Levin sees these stocks as still way undervalued, although they sport strong balance sheets and are trading at less than seven times future earnings before interest, rates, taxes, depreciation and amortization (EBITDA).

Analyst Leo J. Larkin of Standard & Poor's rates both Barrick and Newmont a buy, noting that the growing currency instability is boosting "gold's attractiveness as a monetary reserve asset." He sees Barrick climbing to $57 a share in a year and Newmont exceeding its 52-week high and hitting $68 in 12 months.

Bright Prospects at New Gold

Schmeidler's Levin, on the other hand, sees New Gold as the stock with the brightest growth prospects because it's still relatively small and headed by experienced industry leaders. At the helm of its management team is CEO Randall Oliphant, formerly CEO of Barrick Gold. Two members of its board of directors are former presidents of Newmont and Goldcorp (GG).

New Gold's growth has been 100% self-funded, and it has no need to reach out to the capital markets for further funding, says Levin. He forecasts the stock doubling, to $12 to $14 a share over the next two years.

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New Gold is scheduled to open a new mine, New Alfon, in Canada's British Columbia, in mid-2012, which he estimates will help in doubling its cash flow from operations. Moreover, New Gold owns 30% of Goldcorp's El Morro mine, a giant gold and copper mine that Goldcorp expects will go into production in the next four years.

Canadian-based New Gold is one of the industry's low-cost producers, and it trades at a large discount to its net asset value, says Michael Jalonen, analyst at Bank of America Merrill Lynch, who rates the stock a buy with a 12-month price target of $8.75. Its goal, he notes, is to become a 1 million-ounce gold producer at a lower-than-average cost per ounce in the next five years, notes Jalonen.

So for investors who have yet to catch the gold fever, ample opportunities are still available to profit from the metal; which by all indications will remain precious for some time to come.