Randgold Resources Ltd. (GOLD), Gold Fields Limited (GFI), Kinross Gold Corporation (KGC) and other gold stocks rallied as investors looked to hedge against inflation. The U.S. dollar weakened against other currencies after the Federal Reserve lowered interest rates to help encourage economic activity, which led to a rally in many commodities including gold.
Investors purchase gold for their portfolios in order to hedge against inflation and a declining dollar while also using it as a safe-haven during times of instability. Prices have also been helped by a fall in mine supply, a slowing of central bank sales, ongoing de-hedging by producers, firm demand from ETFs, and a likely recovery in jewelry demand. Meanwhile, banks taking major short positions on the Comex market in New York may also be forced to cover their positions after the market’s recent rally.
Many analysts are also very bullish on the prospects of gold going forward. Goldman Sachs raised its near-term gold forecast on expectations for a weaker dollar and as interest in the precious metal as a safe-haven from risk continues to keep prices moving higher. The bank raised its three-month forecast to $700 an ounce from $690 while also raising its full-year prices to $795 from $710 an ounce. Studies at the bank have shown that gold moves opposite the dollar 90 percent of the time.
Companies like Randgold Resources, Gold Fields, and Kinross Gold could benefit from the rise in prices as it will both increase the value of its current reserves as well as provide funding for future exploration activity. Of course, higher prices also help increase revenues, drive profits, and improve the balance sheet. Moreover, bigger miners like the companies offer a combination of safety and profitability given the fact that they are well-capitalized and trading at near-record low price to net present value multiples.
So, how can investors leverage their position while taking on less risk? One way may be to purchase long-term options called LEAPS (long-term equity anticipation securities). While not available on all securities, these options enable long-term investors to purchase rights to a stock at a set price and time in the future for a much lower upfront payment than purchasing the underlying stock outright. See “Using LEAPS as a Stock Substitute” for more information.
