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How to Make Double the Gold Profits in the New Year - Outside View by Peter Krauth

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How to Make Double the Gold Profits in the New Year
Mar 16, 2012

Despite a pullback from its all-time high of $1,923 an ounce a few months ago, gold is still trading in the $1,700 range. In fact, the glittering metal has gained 22% in the past 12 months.

What's more, I believe gold prices will eclipse $2,200 an ounce in the next year, and shoot beyond even $5,000 an ounce after that. With the economy still in turmoil - and the U.S. dollar sinking even lower in 2012 - gold prices will continue to rise.

So there's obviously still time to get in on this once-in-a-lifetime bull-run, if you haven't already.

Of course, every investor should at least have shares of a gold-based exchange-traded fund, but if you really want to profit from the price surge, you ought to look at gold mining companies.

Let me explain.

A Golden Opportunity

While gold prices have surged in the past year, gold mining stocks have lagged curiously behind over that period.

The Amex Gold Bugs Index, a weighted benchmark made up of 16 of the world's largest gold and silver mining companies, began the year at 540, and after numerous troughs and peaks, we're back near those same levels.

Normally, gold stocks will leverage gold on a 2-for-1 basis, but in this case, we've seen miners move sideways as gold has advanced.

Yet with gold's price powering skyward, the gold miners have seen their margins expand, making them very profitable at current levels. That makes them absolute steals at these prices.

You don't have to take my word for it, either. Just look at what industry insiders are saying.

"A substantial disconnect has developed between the price of gold and the mining companies," said David Einhorn of Greenlight Capital. "With gold at today's price, the mining companies have the potential to generate double-digit free cash flow returns and offer attractive risk-adjusted returns even if gold does not advance further. Since we believe gold will continue to rise, we expect gold stocks to do even better."

Portfolio managers Michael Bowman and Allan Meyer of Wickham Investment Counsel Inc. concur.

"We are now finding a large number of gold stocks are hitting our value screens, something that has been unheard of in the past," said Meyer.

What else are experts noticing?

Well, as gold prices have risen and stayed high, the price/earnings (P/E) ratios of gold miners have been cut in half. That means the sector as a whole is at as compelling a value as it's been in three years. And with the price of gold set to rise still higher on the back of incessant money printing in the United States and Europe, these miners are only going to get more profitable.

How high is gold likely to go?

My own research tells me we should expect gold to easily reach $2,200 in 2012.

A few market mavens have been providing their forecasts too.

Sean Boyd, chief executive officer (CEO) of $7 billion Agnico-Eagle Mines Ltd (NYSE: AEM), recently told King World News, "People are looking for hard assets and gold, being one of the primary hard assets, is a major beneficiary. So we don't see any reason to believe this upward trend in gold won't continue. I think it will continue and we will see $2,000 shortly."

Rajan Venkatesh, managing director for Indian bullion at ScotiaMocatta, said he expects gold prices to touch $2,000 an ounce by March.

And this past June, Standard Chartered PLC (PINK: SCBFF) made what some think is an "outrageous" prediction.

The bank's research team considered the production levels of 345 gold mines and concluded production will rise just 3.6% annually for the next five years, while demand expands much faster.

Their price prediction: $5,000 gold is likely in the near future.

That's a price I'm on record as predicting nearly two years ago.

But now, I've changed my mind - because I think it could go even higher than that.

Top 2012 Profit Plays

So what should you do now to profit from gold's imminent rise?

Here are a few suggestions of gold mining stocks that are primed to play catch up:

  • Alamos Gold Inc. (PINK: AGIGF): Alamos is a $2 billion gold miner, operating the Mulatos mine in Sonora State, Mexico. AGI operates one of the lowest cost heap-leach gold mines in the sector, at $459 per ounce. The company expects to boost production at Mulatos by 50% in the next year, and is working toward producing 135,000 ounces annually at $314 per ounce from its Turkish gold project by 2014. AGI has $210 million in cash and no debt.

  • Eldorado Gold Corp. (NYSE: EGO): Eldorado is a $9.75 billion gold producer with six operating mines, one under construction, and two in development. EGO currently produces about 650,000 ounces annually at $400/ounce. Right now, 56% of gold production is from China and 44% from Turkey. Eldorado could double its gold output by 2015 through new mines coming online in Brazil and Greece, and by expanding the production at some of its current mines.

  • The Tocqueville Gold Fund (MUTF: TGLDX): This is a $2.65 billion fund managed by John Hathaway and has a reasonable expense ratio of 1.35%. Its top ten holdings include large-cap and mid-cap miners, as well as some precious metals royalty companies and about 6.6% in physical gold. The fund does have some exposure to smaller-cap miners that provide additional potential for growth.

  • Gold prices rise when the dollar falls. And my $5,000 prediction for gold is based on a frightening new reality in the United States - a reality where the U.S. dollar could soon drive every investor into the poorhouse. In fact, even if you've saved a $1 million, you could still end up flipping burgers in your retirement. But you still have time to prepare if you act right now.

This article is authored by Peter Krauth. Peter Krauth is a Contributing Writer for Money Morning.

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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