Even Motley Fool?
Time to Go for the Gold?
While the bear market continues among the broad stock market, there's a bull market heating up in... you might want to sit down for this... gold.
Yes, after a 20-year bear market, gold prices are heating up. The Gold Bugs Index (AMEX: HUI), composed of a handful of the major gold producers, is up over 3% as of mid-afternoon today, and is up over 70% since the beginning of September.
During the high-tech boom of the late 1990s, gold was all but written off for dead as the price per ounce reached a low of $253 in 1999. That's down from $400 in January 1996 and $800 in January 1980. Today, gold prices are back above $300. In the wake of dwindling corporate profits, accounting scandals, and high-profile bankruptcies, gold has regained its luster.
Gold may seem like the ultimate fuddy-duddy investment, but Fools should at least be aware of gold's unique qualities as a financial asset. Unlike stocks or bonds, which generally represent paper promises of future cash flows, gold has intrinsic value and no default risk. As such, gold has a "safety premium" that becomes prominent during uncertain times.
Gold has intrinsic value via its demand in jewelry, electronics, dentistry, industrial and decorative uses, medals, medallions, and official coins. On the supply side, gold is not only rare but also costly to locate, mine, process, and refine. This balance of enduring demand and limited supply has made gold a classic store of wealth.
Another interesting aspect of gold is that its price has historically risen during periods of recession and depression, right when stocks have been at their worst:
S&P 500 GoldDec. 1929 - Jan. 1934 -63% 69%
Dec. 1968 - Dec. 1974 -34% 347%Aug. 2000 - Apr. 2002 -26% 9%
Fools wanting to consider a conservative way to invest in gold may want to take a closer look at Newmont Mining Corporation (NYSE: NEM). U.S.-based Newmont is the largest producer of gold in North America and the second largest in the world. At a recent price near $30, the stock trades at a market cap of $5.8 billion. Adding in about $1.3 billion in net debt, the company has an enterprise value of about $7.0 billion and trades at an EV-to-EBITDA multiple of 20x. In addition to today's cash flow, a significant amount of value exists in the company's gold reserves in the ground, which are sufficient to supply a decade of production.
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