Go for the Gold

04/29/2008 12:00 am EST


Jack Adamo

Editor, Jack Adamo's Insiders Plus

The good news about a recession and rate cuts is their ‘glittering’ effect on gold prices, says Jack Adamo, editor of Insider’s Plus…
Bullion has been on fire for months, thanks to cheaper money and higher inflation. That sentiment has changed lately; so, the hot money is exiting fast. The ratio of public buyers to sellers has decreased by 31% since January, as has the number of open futures contracts. The good news is that with no big movements from the smart money, it’s safe to assume the intermediate- to long-term trend is still in place.

If the economy sinks further into recession, that would dampen demand for gold, but it would also raise chances of further Fed rate cuts; so, one way or the other, I think mid-summer should see gold start higher.

I’ve put Newmont Mining Corp. (NYSE: NEM) back in the buy column, and raised its limit a bit. The buy range is less than a dollar from where the stock is right now, but that does not indicate a lack of enthusiasm on my part. Because of the weak environment for gold at the moment, you should be able to get it within its buy range now, and for a while; so, there’s no sense making a higher buy range when we can get the stock right here.

Newmont delivered a great earnings report. The new CEO seems to have turned the ship around. I’m sure there are still some rough waters to get through, as he navigates problems created under the old regime, but I think he’ll get us home safely, and profitably. Newmont reported first quarter net income of $0.82 per share compared to $0.15 last year. Revenues increased 59% from the year ago quarter to $1.9 billion, and while the big jump in realized gold price to $933/ounce was expected, the 2% drop in costs applicable to sale was not. Given fluctuating ore prices and fuel costs, mining profits are notoriously “rocky” so you can’t really project from one quarter to the next, but if you annualize this quarter’s profits, Newmont is selling at just 14-times earnings.

Considering the outlook for gold compared to the rest of the economy, earnings anywhere near the current quarter’s rate would make this stock a great bargain. Buy Newmont Mining up to $45. Take a standard 4% portfolio position. In light of the seasonal slump in gold, if you have a large portfolio, you should consider accumulating a position over the next few months, with an emphasis on buying on weakness. 

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