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With the price of gold setting itself up for a run above $1300 in 2010 —and probably much higher thereafter — many investors are asking me what’s the best way to take advantage? My answer to that is leverage. Yes, you can buy physical bullion — which I highly recommend — but it doesn’t provide leverage. And to really take advantage of the coming generational bull-run, leverage is a must. So where do you find it? In gold stocks. Let me explain... When the price of gold increases by 10%, very often the price of gold stocks will increase by a multiple of that. Take for example a gold mining company with a 12% operating margin. In this case, if the gold price increases by 10%, the operating margin of the company would nearly double. And since the value of the gold company is a function of the present value of its projected cash flow, the value that Wall Street puts on the company would nearly double as well. So in this example, a 10% increase in the price of gold led to something like a 90% increase in the value of the company. To put it simply, a modest increase in the price of gold results in a dramatic increase in the value of a gold company’s mineral assets, which inevitably leads to a dramatic increase in the company’s share price. This is the great benefit of owning stock in gold companies when the price of gold increases. But it doesn’t end there. Take the example of a gold company whose mine may be unprofitable to operate when gold prices are low. In essence, the value of the company is negligible, since its gold assets cost more to mine than they are worth at present gold prices. One would expect the share price in such a situation to be low. However, as the gold price increases, the gold assets suddenly become valuable, and the mine becomes profitable. Gold assets which were once worth nothing are now worth millions... possibly billions. You can bet this would have a dramatic effect on the company’s share price, causing it to soar by a magnitude that’s substantially higher than the increase in the price of the metal. The bottom line is, if you’re looking to take advantage of the rise in gold prices, leverage through gold stocks is the ideal way to profit. Yours in profits,
Roger Gaines |
