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The right way to cash in with gold
Strategy Lab is MSN Money's stock-picking challenge. To learn more about the game -- and the contenders -- click here.
Gold is in a primary bull market, so it's no surprise that Barrick Gold ( ABX, news, msgs) has been my top performer in this round of Strategy Lab -- with a return of more than 30% in three months.
Not surprisingly, many readers are asking my thoughts on the stock and my plans for the position. In short, I have no intention of selling.
My rationale for including the stock in the portfolio was that it represented historic good value -- and because, like a lot of you, we at IQ Trends have reservations about the dollar and wanted a hedge against inflation. In simpler terms, we felt the stock was a good diversification opportunity.
Now trading at about $42, Barrick has the potential to run up to $100 per share, based on its current dividend of 30 cents per share compared to historic levels.
Why not gold bars?
So why buy gold stocks instead of gold? It comes down to philosophy. My neighbor Richard Russell, who writes Dow Theory Letters, systematically acquires gold coins with no intention of ever selling them. The metal obviously pays no dividends or interest, so the investment benefit is the store of value and a way of holding tangible wealth. The coins can also serve as tender if the fiat currencies become worthless.
But gold shares are a way to participate in the big rise in the price of gold without having to take physical custody. Gold stocks are also liquid and, in the case of Barrick, pay a dividend -- which is the key to my investing strategy.
Practically, the price of gold is up 18.6% this year while Barrick's stock is up 40%. So the stock has certainly been the better investment this year.
Let me share a few facts about Barrick for those readers that are unfamiliar with the company.
Barrick Gold is the world's largest gold company in terms of production and reserves. The company has a portfolio of 27 operating mines, along with seven advanced exploration and development projects across five continents. It ended 2006 with 123 million ounces of proven and probable gold reserves, and proven and probable copper reserves of 6.2 billion pounds.
ABX became free-cash-flow positive in 2006 and as, of Feb. 21, had eliminated its fixed-price corporate gold sales contract positions, more than two years ahead of its previously announced target date. Those locked in lower prices.
The key is quality
Readers may wonder how a gold mining company would fit into the portfolio of a firm that focuses on quality, value and dividend yield. With the exception of 25 years of uninterrupted dividends -- ABX started paying its dividend in 1987 -- the company meets the five rules that define what we call select blue chips. Its current 1% dividend yield, for example, makes it historically undervalued.
We started our position in Barrick in January of 2003 at $15 and added to the position in May of 2003 at $17, and again in March of this year at $28. That's an average cost of $20 per share. The current dividend of represents a 36% increase since our initial purchase.
As a gold-mining company, the stock seems on the surface to be a deviation from those our selection process usually singles out, especially when compared with such better-known names as Coca-Cola (KO , news, msgs), Johnson & Johnson ( JNJ, news, msgs), McDonald's ( MCD, news, msgs) and PepsiCo ( PEP, news, msgs). We would suggest, however, that it proves that it doesn't matter how large or well-known a company is. If it's of high quality and has a long track record of uninterrupted dividends and dividend increases, it's a good investment.
