3 Precious Picks

Van Eck International Investors Gold A (INIVX) seeks long-term capital appreciation by investing in common stocks of gold mining companies. The fund was incepted in January 1956.

The fund normally invests at least 80% of total assets in the gold mining industry, with at least 25% of assets invested in gold mining stocks. The fund may invest up to 100% of its assets, or, for temporary defensive purposes, less than 25% of its assets in gold stocks. Randgold Resources Limited, Goldcorp Incorporated and Agnico-Eagle Mines Limited are among its major holdings.

The fund declares and pays dividends in March, June, September and December. Capital gains, if any, are distributed in annually in December. It has an expense ratio of 1.44%.

Joseph M. Foster has been lead manager of the fund since July 1998. Foster has been with Van Eck Associates Corporation since 1996.

RiverSource Precious Metal & Mining A (INPMX) was incepted in April 1985. The investment seeks long-term growth of capital.

The fund primarily invests in securities of companies engaged in exploration, mining, processing or distribution of gold and other precious metals and related minerals. It invests at least 80% of assets in securities of companies in the precious metal industry. At least 50% of its total assets are invested in foreign securities. The fund may also invest up to 10% of its total assets in gold, diamonds, silver bullion, other precious metals and minerals.

The fund has an expense ratio of 1.52%. As of June 2009, its portfolio turnover was 340%. The fund distributes dividends and capital gains, if any, annually.

Clay L. Hoes has been lead manager of the fund since June 1999. Prior to joining RiverSource Investments, in1999, Hoes was a vice president and portfolio manager with Scudder Kemper Investments.

Fidelity Select Gold Portfolio (FSAGX) seeks capital appreciation. It was incepted in December 1985.

The fund invests at least 80% of its assets in common stocks of companies principally engaged in gold-related activities, and in gold bullion or coins. The management also invests in other precious metals, instruments whose value is linked to the price of precious metals and securities of companies that manufacture and distribute precious metal and minerals products.

Shareholders have to make a minimum initial investment of $2,500 to enter this Zacks#1 Rank (“Strong Buy") fund. It has an expense ratio of 0.89%.

S. Joseph Wickwire has been lead manager of the fund since August 2007. Wickwire is a Chartered Financial Analyst and joined Fidelity Investments in 2007.

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Chicago, IL – October 22, 2009 – Zacks.com releases the latest Zacks Industry Rank. Stocks featured in this week’s analysis include Barrick Gold (ABX), Eldorado (EGO), Goldcorp (GG), Freeport-McMoRan (FCX), Pan American Silver (PAAS), Market Vectors Gold Miners (GDX), S&P 500 SPDR (SPY) and Gold SPDR (GLD).

Zacks Industry Rank Analysis is written by Charles Rotblut, CFA, Senior Market Analyst for Zacks.com.

This week: Gold Miners’ Margin Problem

As gold sets new highs, it would only be natural to assume that profit forecasts for gold mining companies would be soaring too. Surprisingly, profit forecasts are not jumping.

Though some brokerage analysts have raised their full-year projections in recent weeks, the Zacks Consensus Estimate is not moving higher for most gold miners. Rather, it is essentially unchanged for Barrick Gold (ABX), Eldorado (EGO), Goldcorp (GG) and most of their peers.

Where are we seeing increases are for companies that are significantly dependant on other metals, such as copper or silver. For example, the 2009 Zacks Consensus Estimate for Freeport-McMoRan (FCX) has risen 67 cents over the past 30 days to $3.79 per share. (Yesterday, FCX reported third-quarter profits of $2.07 per share, topping forecasts for $1.14 per share). Analysts had Pan American Silver (PAAS) is also seeing expectations rise with the Zacks Consensus now at 75 cents per share, versus 70 cents a month ago.

Ore Quality Is An Issue

A big reason why the gold miners are not shining as brightly as the precious metal is the quality of the ore being mined. There is a general school of thought that the miners are digging up ore that is more difficult to process. As result, this is adversely impacting costs.

When miners dig up gold, they are effectively taking rock out of the ground. Though the goal would be to just dig up gold, the actual rocks contain various other metals and minerals. This means the mining company has to separate the gold from the other metals. Ore is considered to be higher quality when there is a greater concentration of gold in the rocks. Conversely, ore is considered to be of lower quality if the rock contains less gold.

Obviously, it is in every miner's best interest to dig up higher quality ore. However, as more and more gold is dug up, the quality of the ore decreases, hurting margins. It is this concern that has many analysts unwilling to raise their profit forecasts.

Investors should note that this is not dissimilar to what is occurring with oil. Many of the newly discovered oil fields are in areas where it is expensive to drill in. An example is Brazil's Tupi field, which lies several miles below sea level.

Not The First Time Analysts Have Been Cautious

What's interesting about the lack of estimate revisions is that this is not the first time it has happened. Back in February, when gold broke above $1,000 for the first time this year, I pointed out that brokerage analysts were not raising their forecasts. (Read Why Gold Miners Are Not Glittering.) Rather, analysts were cutting forecasts at that time.

Since then, gold mining stocks have rallied with Market Vectors Gold Miners (GDX) gaining about 43%. However, had you invested in a fund that tracked the S&P 500 instead, you would have realized an approximate 42% return. In other words, you could have gotten a similar return with considerably more diversification by buying S&P 500 SPDR (SPY) instead of GDX. (An investment in gold, via Gold SPDR (GLD) would have only earned you an 11.2% return over the same period of time.)

As you can see, while gold has been rallying, it has not given investors the best opportunities to profit. The mixed earnings estimate picture for gold miners suggests that the risks of investing in these companies remains elevated. Though gold mining stocks could still go higher, especially if third-quarter margins are better than expected, there are industries whose short-term prospects are brighter.

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Based in Vancouver, Canada, Silver Wheaton is the world's only silver trading company. It does not own or operate mines, but buys silver at below-market prices through long-term contracts with five major silver producers including Goldcorp Inc. (GG), Lunding Mining, Hellas Gold and Glencore and then reselling it to major industrial customers at a markup.

Barrick will receive $3.90 for each ounce of silver delivered under the agreement, which covers the life of the mining project, expected to be about 25 years. For Silver Wheaton, the deal will generate 9 million ounces of silver annually over the first 5 years at the Pascua-Lama mine, which will raise the company's output to 40 million ounces by 2013. Barrick expects production at Pascua-Lama in the range of 750,000 ounces to 800,000 ounces of gold and 35 million ounces of silver in the first 5 years.

Located on the Chile–Argentina border, Pascua-Lama is one of the richest deposits of precious metals in the world. It is expected to be one of the world's largest and lowest-cost gold mines and has one of the biggest global silver deposits. Barrick started the project in May this year.

Until Pascua-Lama begins production sometime in 2014, Silver Wheaton will receive 100% of silver produced from three other Barrick mines – the Lagunas Norte and Pierina mines in Peru and the Veladero mine in the south of Pascua-Lama in Argentina. Barrick will retain 100% of the gold production at all mines and 75% of the silver at Pascua-Lama. While the deal provides Barrick with a source for financing its Pascua-Lama project, it significantly expands Silver Wheaton’s reserves.

Increase of Equity Offer

Separately, Barrick Gold raised its equity offering by $500 million. The Canadian gold mining company increased its offering to about $3.5 billion, or to 94.8 million shares, at $36.95 each, from a previous offering of $3 billion, or 81.2 million shares. The company also stated that the offering could surge to $4 billion if an overallotment is exercised.

Barrick plans to use $1.9 billion of proceeds to eliminate fixed priced gold contracts and $1.5 billion to eliminate a portion of its floating spot price contracts. It will record a third-quarter charge of $5.6 billion due to a change in accounting treatment for the contracts. We maintain our Neutral recommendation on the stock.

The gold mining company's revenues slipped to $188.6 million, compared to $208 million a year ago, primarily due to closure of the Sleeping Giant mine.

IAMGold, on Feb 25, completed the acquisition of Orezone Resources Inc. and its 90%-owned Essakane gold project. The company further stated that the Essakane project is one of West Africa's largest undeveloped gold properties with production expected in the second half of 2010.

Meanwhile, IAMGold affirmed 2009 production guidance of 880,000 ounces of gold at an average cash cost of $470 to $480 per ounce.

The full-year consensus estimate has increased by a penny over the past month to 40 cents per share, as 2 analysts out of 11 raised expectations while 1 lowered.

IAG, a Zacks #3 Rank ("Hold") stock, has declined almost 3% on volume of approximately 1.7 million, which is lower than the average daily volume of about 2.4 million.

Not that you should listen to me, or anyone else who's entertaining the idea of trying to time this—or ANY market. (Exhibit A is my ill-advised November 2008 buy of XLF, the Select Sector SPDRs Financials ETF). The market COULD easily be back on track and headed to 15,000. But I'd say that consensus still has this as a bit of a false bull run, with us circling back around at some point to test the lows.

So given that everything else in my financial life lines up nicely with an equity bull market, the gold hedge doesn't seem like such a bad call, particularly vis-a-vis the dollar, which may be looking more and more like the Zimbabwean dollar the way Obama, Geithner and the good-times spending crew are going to have us printing money. That Zimbabwean dollar, by the way, is trading at $4.5 BILLION to a U.S. dollar. And that's the buffed-up official rate.

You've got some different options on gold-there's the behemoth ($31 billion plus) SPDRs Gold Trust (NYSE Arca: GLD) and iShares Gold Comex Gold Trust (NYSE Arca: IAU), which has about $1.8 billion. If you like the share-play angle (the one I'd always used exclusively until the bullion funds became an option), you've got Van Eck's Market Vectors Gold Miners ETF (NYSE Arca: GDX) on the ETF side, with $2.38 billion in assets of its own. Ironically, the reason people like GDX is that it sometimes shows more volatility than the price of bullion itself (which may feel counterintuitive with the way gold-mining companies hedge the price of gold. But that's the stock market for you, I guess).

To give you an idea, GLD is currently trading at $85.27 a share (more or less on par with 1/10-of-an-ounce of gold, minus the tiny amount of gold that has been sold off over the years to pay the 40 bps fee). It has a 52-week range of $68.81 to $98.99. GDX, on the other hand, is currently trading at $33.20 and has a 52-week range of $15.85 to $51.84. So at a glance, if you want more of a boomerang effect, consider going GDX. If you want the shiny yellow stuff with your name on it in a vault, consider going for the gold bullion ETFs. Wait a bit and there will be at least one other U.S.-listed option as well, from London-based ETF Securities.

We'll Miss You, Greg Newton

The small world of ETF punditry has suffered a mighty blow with the passing of Greg Newton (of a heart attack last week). The ebullient Aussie was all piss and vinegar, and his blogs were as witty and insightful as they were irreverent. Naked Shorts is still up and as biting and funny as ever for those of you who wish to take a gander and spend some time remembering Greg.

We were close with him here at IndexUniverse.com, where Greg was a sometime-contributor and always kept things interesting for us. Back in his days at MARHedge, he brokered the deal that had us purchase the ETFR publication. He seemed happier, and a little wilder when he went off to do Naked Shorts—which was just as he wanted it.

We'll miss you Greg. I'm sure you're already stirring up some trouble wherever you are.

Do you remember the 1970 Academy Award-winning movie Patton, starring George C. Scott? In the beginning of the movie, Scott — playing the iconic American Gen. George S. Patton — stands in full dress uniform, backed up by a gigantic American flag. Scott then rouses the troops (and the audience) with a stirring speech that follows the lines of the address the real Patton gave the Third Army on June 5, 1944, the eve of the invasion of France in World War II.

Patton’s original speech is considered by many to be one of the great motivational talks in all of military history. And actor Scott’s…

More from Whiskey & Gunpowder:

There are only two things gold bulls should worry about from this point forward, now that the general commodity correction is out of the way and the froth has been worked out of the market: deflation in the strict sense of the term (monetary, not asset deflation) or a suddenly brightening economic outlook, both of which, in this writer’s…

The spread between gold miners and gold bullion has widened considerably since the beginning of the credit crisis in August last year.

Eric Roseman says this only happens in extreme market circumstances.

He expects gold stocks to double over the next one to three years because colossal global government bailouts will back fears over inflation.

This from The Sovereign Society

Since the start of the credit crisis in August 2007, the XAU Gold & Silver Index of mostly large-cap mining stocks has tumbled 27%.

In October alone -- the worst month for investors in global stocks since August 1998 -- the XAU Index has so far tanked 20%.

Gold bullion, however, has gained a cumulative 26% since the outbreak of credit panic in August 2007. As the rest of the markets have crashed this month, gold has only declined 2%.

Gold stocks are another story. They have failed miserably so far this year.

They're failing despite the fact that mine production will remain flat in 2008. Not to mention, demand is booming among nervous investors who are searching for a safe haven. Also, European private banks have to wait almost three weeks to fill orders for clients -- there's barely any net gold supply.

What ever happened to gold stocks protecting portfolios during a market crash? Why have gold stocks disconnected from gold bullion lately?

On occasion, gold and gold stocks can deviate from each other. This is why you always should hold both physical gold (bars, coins, certificates) AND gold mining stocks as part of your precious metals strategy.

Historically, this happens during extreme market circumstances. For instance in late 1979, gold stocks collapsed while gold bullion climbed to US$850 an ounce by January 1980.

The same phenomenon took place over the last 12 months. Gold stocks have been absolutely mauled while physical gold has rallied. Gold stocks are now trading at a seven-year high compared to the physical metal judging by the gold-to-XAU Index ratio. That means gold stocks are absurdly cheap compared to the metal itself.

This is the time to hold both gold and the precious metal stocks, including silver.

The ongoing shift from a world obsessed with rising inflation has peaked since July. The major focus now is accelerated deflation, or an environment of rapidly declining asset values. This is the first time since the 1930s that prices worldwide are simultaneously falling together - stocks, bonds (non-government), real estate, hedge funds and other financial assets.

In a deflation, gold should hold its value. But anything traded on the stock market is unlikely to rise in value as the Wall Street tidal wave sinks all ships.

And to make it worse investors have thrown out the gold stocks in their scramble for liquidity. Since last Wednesday, they have even started to sell Treasury bonds to meet liquidity provisions or margin calls.

Eventually, the world will reflate again. Budget deficit targets in Europe will be smashed, the United States will expand credit like a monster. And in time, inflation will make a big comeback - a far more serious comeback than what we've seen so far.

I expect gold stocks to probably double from these bombed-out levels over the next 12-36 months. Prices are extremely low.

As a fellow gold-bug, I feel your pain but I urge you to remain steadfast in your gold positions. The enormous cost of this now global bailout will continue to rise. As it does, gold will continue to rise in value.

Be patient with gold and the gold stocks. Salvation is coming.

Source: Why Gold Stocks Failed

The spread between gold miners and gold bullion has widened considerably since the beginning of the credit crisis in August last year.

Eric Roseman says this only happens in extreme market circumstances.

He expects gold stocks to double over the next one to three years because colossal global government bailouts will back fears over inflation.

This from The Sovereign Society

Since the start of the credit crisis in August 2007, the XAU Gold & Silver Index of mostly large-cap mining stocks has tumbled 27%.

In October alone -- the worst month for investors in global stocks since August 1998 -- the XAU Index has so far tanked 20%.

Gold bullion, however, has gained a cumulative 26% since the outbreak of credit panic in August 2007. As the rest of the markets have crashed this month, gold has only declined 2%.

Gold stocks are another story. They have failed miserably so far this year.

They're failing despite the fact that mine production will remain flat in 2008. Not to mention, demand is booming among nervous investors who are searching for a safe haven. Also, European private banks have to wait almost three weeks to fill orders for clients -- there's barely any net gold supply.

What ever happened to gold stocks protecting portfolios during a market crash? Why have gold stocks disconnected from gold bullion lately?

On occasion, gold and gold stocks can deviate from each other. This is why you always should hold both physical gold (bars, coins, certificates) AND gold mining stocks as part of your precious metals strategy.

Historically, this happens during extreme market circumstances. For instance in late 1979, gold stocks collapsed while gold bullion climbed to US$850 an ounce by January 1980.

The same phenomenon took place over the last 12 months. Gold stocks have been absolutely mauled while physical gold has rallied. Gold stocks are now trading at a seven-year high compared to the physical metal judging by the gold-to-XAU Index ratio. That means gold stocks are absurdly cheap compared to the metal itself.

This is the time to hold both gold and the precious metal stocks, including silver.

The ongoing shift from a world obsessed with rising inflation has peaked since July. The major focus now is accelerated deflation, or an environment of rapidly declining asset values. This is the first time since the 1930s that prices worldwide are simultaneously falling together - stocks, bonds (non-government), real estate, hedge funds and other financial assets.

In a deflation, gold should hold its value. But anything traded on the stock market is unlikely to rise in value as the Wall Street tidal wave sinks all ships.

And to make it worse investors have thrown out the gold stocks in their scramble for liquidity. Since last Wednesday, they have even started to sell Treasury bonds to meet liquidity provisions or margin calls.

Eventually, the world will reflate again. Budget deficit targets in Europe will be smashed, the United States will expand credit like a monster. And in time, inflation will make a big comeback - a far more serious comeback than what we've seen so far.

I expect gold stocks to probably double from these bombed-out levels over the next 12-36 months. Prices are extremely low.

As a fellow gold-bug, I feel your pain but I urge you to remain steadfast in your gold positions. The enormous cost of this now global bailout will continue to rise. As it does, gold will continue to rise in value.

Be patient with gold and the gold stocks. Salvation is coming.

Source: Why Gold Stocks Failed

Should you be investing in it?

Investors around the world are flocking to the yellow metal. The South African Rand Refinery which manufactures the popular Krugerrand coin, is now operating its plant 7 days a week to keep up with demand for its gold coins. Similarly, the Austrian mint has added weekend production.

In Perth, Australia, the Perth Mint has hired more staff and has doubled its coin production. About 80% of its business is done outside of Australia in North America, Europe and Asia.

The U.S. Mint recently announced it was temporarily suspending all sales of the 24-karat American Buffalo gold coins due to increasing demand as the Mint's inventories were depleted.

A few weeks ago, it also suspended sales of the American Eagle coins, also due to strong demand. American Eagle sales resumed, but only to a select group of designated dealers. The Mint will also resume sales of the Buffalo coins shortly.

But buying coins is different from buying shares in gold mining companies. The price of gold does not always correlate with earnings of mining companies. Stocks of gold mining producers sometimes decline even when gold prices are soaring.

Should You Buy Gold Mining Stocks Now?

The price of gold has been volatile, with big swings in the last two weeks. Gold stocks have also seen big moves up and down. Neither is for the faint of heart.

There are two categories of gold mining stocks: the junior miners and the large miners. The large miners have a longer history of earnings and are usually believed to be less volatile. The junior miners are riskier but that risk can pay off big if gold prices soar.

I did a screen on Research Wizard to find gold mining stocks that were at least a Zacks Rank #3 and had earnings growth.

Barrick Gold (ABX) is one of the world's largest gold producers with 27 mines on five continents. ABX, headquartered in Toronto, is a Zacks #3 Rank stock. It has surprised on estimates 2 out of 4 quarters by an average of 1.45%. Analysts expect earnings growth of 10%.

Newmont Mining (NEM) is also one of the world's largest gold producers with mines on 5 continents. Newmont was founded in 1921 and is headquartered in Denver. The company is a Zacks #3 Rank stock. Analysts expect earnings growth of 14.3%.

Drdgold Limited (DROOY) is a South African medium-sized gold producer with mines in South Africa. Drdgold is a Zacks #1 Rank (Strong Buy) stock. Analysts expect earnings growth of 42.15%.

Gold Stocks Not the Only Bet

Individual gold stocks may be too risky for your investing style. You can invest directly into gold itself through an exchange traded fund, SPDR Gold Shares (GLD), which was launched in 2004. This ETF tracks gold prices as determined by the London PM fix and actually holds gold as a custodian.

Investors flocked to GLD in September, pouring in an additional $4 billion, on top of the $17.4 billion in assets the ETF had at the end of August.

Don't Get Blinded by Gold's Shine

A gold-focused investment may be a way to diversify a portfolio, but that's all it should be: diversification. Don't place all your bets on one sector or asset class. It was that singular emphasis, on real estate and before that on technology stocks, that has tripped up investors in the past.

Gold has shone brightly during dark times before but as quickly as it soared, it also lost its luster.

Look at gold, and gold stocks, for what they are, a safer haven in a time of uncertainty. Invest accordingly.

Additional Ways to Find Gold Stocks

Zacks Custom Screener - This is the place to start to create your own free screens where you can search by sector.

Zacks Equity Research - Find out detailed stock information from Zacks analysts.

Research Wizard - Create your own customized portfolios.

[The author of this article owns shares of SPDR Gold Shares.]
"ABXF" Free Stock Analysis: Buy? Sell? Hold?
"NEM" Free Stock Analysis: Buy? Sell? Hold?
"DURO" Free Stock Analysis: Buy? Sell? Hold?
"GLD3" Free Stock Analysis: Buy? Sell? Hold?
Zacks Investment Research

Higher gold prices bode well for Kinross' top-line growth. The various exploration and expansion activities undertaken will enhance production levels. KGC has received approval for a huge investment in the Paracatu mine expansion, which is expected to start production at the end of 2008-third quarter.

The acquisition of Bema Gold will bring in various synergies. However, declining production levels at some of the existing operations and higher mining, energy, and administrative overhead costs are likely to constrain margin expansion. Consequently, we reiterate our Hold recommendation on shares of KGC, with a six-month target price of $15.00.

Read the full analyst report on KGC