Forget The Correction: Here Are The Best And Worst Gold Bets For 2012

Despite suffering a massive December correction, the underlying fundamentals for gold point to another strong year in 2012.  Extraordinarily loose monetary policy in so-called advanced economies, the beginning of anti-cyclical easing and stimulus cycles in emerging economies, and rising central bank demand for the physical metal, particularly from China, should push gold prices higher in 2012, setting the stage for some gold equities to shine.
There is no doubt that gold has been a market protagonist in 2011.  From the beginning of the year, gold prices went on an exponential jump, hitting regular new nominal highs as it surged more than 35% to $1,920 an ounce in early September.  Just in a few weeks, though, gold plummeted more than $350, nearly 20% to lows near $1,550.  After attempting to break to the upside again, gold plummeted in December, falling to $1,574 an ounce on Wednesday, its lowest value since early July.
Even though traders like Dennis Gartman believe the yellow metal will fall even further, underlying variables that helped gold ride a decade-long bull run are in place to provide support in 2012.  If indeed gold will rise to$2,075 by the second quarter of 2012, asBarclays suggests it will, then the December correction could be a great buying opportunity.
It is hard to say precisely what variable is conditioning gold’s price behavior.  Gold, as Forbes’Robert Lenzner explains, trades inversely to the U.S. dollar 70% of the time.  Earlier this year, the yellow metal seemed to be the negative mirror image of 10-year Treasury yields, while recently it has traded more like a risk asset, moving in tandem with the Dow and the euro.  With low interest rates set to prevail across advanced economies, gold continues to benefit from a lower opportunity cost of holding an asset that doesn’t generate income.
For those who see gold as an inflation hedge, emerging economies, which will lead in terms of economic growth in 2012, are embarking on easing cycles to stimulate their slowing economies.  Brazil, China, and others are moving toward looser monetary policy, expanding their monetary base andunleashing fiscal stimulus.  These will join the central banks of the U.S., U.K., and Europe in expanding their balance sheets, which Tom Winmill of the Midas Funds estimates have already grown by about $6 trillion since the inception quantitative easing by the Fed.
The easiest, and purest, way to gain portfolio exposure to gold is through the iShares Gold Trust, the largest physically backed ETF.  GLD, which is the ETF’s ticker symbol, tracks the spot price of bullion and provides investors with a highly liquid and hassle free tool to bet on the precious metal.
Another way to play gold is via equities, but these have substantially underperformed in 2011.  TheGDX gold miners ETF is down more than 20% vis-à-vis the GLD, and has fared worse than the S&P 500 this year.  Hedgie David Einhorn said in Novemberthat the disparity between miners and metals has grown too big as he shifted some of his GLD holdings into GDX.  Jon Foster, head of Van Eck’s actively managed gold funds, adds that gold miners are pretty much all unhedged, fully exposing them to the price of gold.
Production costs per ounce stand at around $800, according to Barclays.  That means miners are set to make a 98% profit per ounce if they sold at spot prices, even despite the impressive December correction.  This will definitely benefit large-caps like GoldcorpBarrick Gold, and Newmont, according to Winmill.
Beyond production costs, investors should look at a miner’s projects, and their relative safety, before jumping on board.  Winmill warns that several small caps, like Primero Mining, are overly exposed to bad projects.  Primero’s San Dimas mine, for example, was a castaway from Goldcorp and could pose big tax problems, Winmill noted.  Another point investors have to watch out for, Winmill explained, is companies’ overall portfolio.  Freeport McMoran, for example, isn’t among Winmill’s favorites given its large exposure to copper and therefore the Chinese economic cycle.

Gold has proven to be a violently volatile asset in 2011, going on skyrocketing rallies and precipitous declines over short time frames.  If indeed the yellow metal continues its decade-long rally in 2012, then this latest correction will have proven to be a very profitable entry point for bullion.  And if it’s indeed time for miners to catch up, as Einhorn and Winmill think, then 2012 will be the time to place one’s bets.

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