Green on Gold

01/14/2005 12:00 am EST


Alexander Green

Chief Investment Strategist, The Oxford Club

Alexander Green is comfortable taking contrary positions. In January 2000 he said, "We are at the peak of the greatest financial mania of our lifetimes." What does he see ahead for 2005? He now says, "I expect gold shares to be the top-performing equity class this year."

"Besides being lovely to behold, gold has an attractive combination of chemical and physical properties. It is virtually immune to the effects of air, water and oxygen. It will not tarnish, rust, or corrode. And it is completely recyclable. Thousands of mechanical devices require gold to ensure reliable performance over long periods. Billions of gold-coated electrical connectors are used throughout the computer, telecommunications, and home appliance industries. Weather and communications satellites depend on gold-plated shields for protection from solar heat. Even the automobile industry depends on gold-coated contacts for sensors that activate air bag systems. In short, gold is used for everything from wedding bands to fillings to optic lasers. With a limited supply and worldwide demand rising steadily, the price of gold is heating up.

"So what’s the best way to play the upward trend that’s becoming a stampeding bull? The latest addition to our portfolio is AngloGold Ashanti (AU NYSE), the world’s largest gold company. Headquartered in Johannesburg, AngloGold has 19 major operations in Argentina, Australia, Brazil, Mali, Namibia, Tanzania, the US, and, of course, South Africa. This miner is growing aggressively, both by successful exploration and through acquisitions.

"The company’s objective is to uncover new production that meets its strict financial criteria. Specifically, AngloGold targets long-life, low-cost ore bodies. A rising gold price, of course, is highly positive for AngloGold. Most of its mining costs are fixed. So as the price of gold rises, so does its profitability. For the nine months through September, revenues rose 16%, to $1.75 billion. I expect the company to earn 82 cents a share for 2004 and more than double that amount next year. (And that’s if there’s no further increase in the price of gold.).

"Our view is that gold should play a part in every serious investor’s portfolio. The dollar is in a tailspin, terrorist groups are threatening mayhem, commodity prices are rising, and worldwide gold demand is stronger than ever. Gold mining stocks should be an out-of-the-ballpark homer. If gold rises even 10% from here, our shares of AngloGold could easily double. Expect AngloGold to climb in a flat market for gold, but truly soar if gold prices continue to push ahead. Overal, gold should be the best asset class for the coming year and AngloGold should be a prime beneficiary of this trend."

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