A Nickel Saved ....

07/22/2005 12:00 am EST


Alexander Green

Chief Investment Strategist, The Oxford Club

Gold has also gained the attention of two leading long-term value investors. Here, Steve Sjuggerud, editor of True Wealth, offers his outlook on metals, while Alexander Green, investment director for the Oxford Club, suggests a favorite stock play in the gold sector.

"Okay, here's a guaranteed investment scheme," jests Steve Sjuggerud."Let's just buy up all the nickels we can get our hands on. Since the underlying metal in a nickel today is worth about six cents, we lock ourselves in at a guaranteed 20% profit by selling short the coin's metal in the financial markets today. Then all we need to do is melt down the nickels. Okay, so it's not so easy. But the more I look for 'no-brainer' assets, the more I'm drawn to metals, including gold.

"While every other asset out there (stocks, bonds, and real estate) has appreciated dramatically over the last 25 years, commodities and gold in particular have gotten cheaper and cheaper. Adjusted for inflation, gold is unbelievably cheap. As the well-known advisor Richard Russell recently noted, 'Leave your grandchildren twenty thousand of today's paper dollars, and only God knows what that will buy them when they reach the age of 21. Leave your grandchildren twenty thousand (current) dollars worth of gold, and when they reach age 21 they will have a good chunk of spending money, I'll guarantee it.'"

Adds Alexander Green, "Throughout history, gold has inspired everything from art to conquests to discoveries, including Columbus' trip to the New World. More recently, gold has been neglected. Gold peaked at more than $800 an ounce in 1980, then declined to less than $350 an ounce in the 1990s. But lately the barbarous relic has been staging a 'stealth rally.' Gold has actually risen 13% a year for the last three years. In January, we predicted gold shares would be a top-performing asset class this year. So far, it hasn't panned out. But it's only mid-year. And it's still quite possible we'll see a gold rally before Santa descends from the North Pole. And if gold moves higher, then gold shares should get an Oscar. Typically, a 10% rise in gold will drive up blue chip producers 50% or more. Fortunately, the chips don't get any bluer than Newmont Mining (NEM NYSE).

"With a market cap of roughly $18 billion, Newmont is the second-largest gold mining company in the world. It has mining operations in the US, Australia, Peru, Indonesia, Canada, Uzbekistan, Bolivia, New Zealand, Ghana, and Mexico, with more than 94 million ounces of proven and probable gold reserves. (Newmont also produces silver, copper, and zinc, and runs a merchant banking operation.) Newmont has been a good investment for us. Our shares are up 42%, excluding dividends. And we see plenty of upside ahead. Newmont is still expanding. Gold production is rising. (The company has mineral rights to more than 51,000 square miles of property.) And Newmont doesn't hedge its gold production. So we've got plenty of upside when the price of gold starts to really warm up. In short, gold remains in a confirmed uptrend. And our shares of Newmont remain an excellent way to participate."

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