The Next Gold Rush - Page 2

August 30, 2006

Goldcorp made a monumental run from February to May, appreciating from $24 to over $40 a share. The stock has come back down to the $30 a share range now, but continues to show promise. Despite the high gold prices that have been prevalent recently, Goldcorp has a spotty record of meeting earnings expectations. Analysts, however, are anticipating a 40% annual earnings growth rate over the next 5 years – surpassing the 18% industry average.

Risks to mining companies include those of any company operating in fragile regions of the world. Newmont Mining (NEM) recently dealt with a blockade in Peru over protests by workers. Foreign governments have been known to seize a company’s assets if even a small dispute arises. Newmont also suffered the seizing of its gold and assets in Uzbekistan recently.

After growing at a breakneck pace of 45% annually over the past 5 years, Newmont is only expected to grow its earnings by 26% during the next 5 years. Shares of Newmont haven’t moved at the pace competitors like Goldcorp have. Over the past year, Newmont is only up about 30%, while Goldcorp has gained 75%. The better investment of the two is clearly Goldcorp due to its strategic advantages and superior growth rate.

Comparing the performance of the ETF’s and individual companies reveals that the ETF is a stable alternative to investing in gold companies. The ETF’s do a good job tracking and matching the performance of average mining company’s. Stronger stocks like Goldcorp and Glamis have outperformed the ETF’s since they can get a greater benefit from higher gold prices. Looking at the different ETF’s uncovers little difference or benefit from differentiating the two. Streettracks currently backs about 13.5 million ounces of gold, while iShares only has 1.5 million.

Despite the recent deflating of speculative money out of gold, there is still a premium at play, just like oil prices. Over the long run, however, the fundamentals should support another momentous run. The physical demand for the metal due to its useful applications in the electronics industry, jewelry, and uses as an investing tool will contribute to the strong future for gold. $1,000 or even $2,000 an ounce isn’t out of the question in the next five years. Investors should position themselves soon to not be left behind in the next big gold rush. This time around, you don't even need to do the dirty work and pan for gold - instead just pick up a simple ETF or company stock. After all, you don’t want to miss out on another Google-esque opportunity.



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At the time of publication, Dhinesh Ganapathiappan did not own or control shares of any companies mentioned in this article.