Gold Price Outlook 2012: Miners Will Shine as Prices Soar

[Editor's Note: This special report on currency investing is part of Money Morning's annual "Outlook" series, which forecasts the prospects for stocks, commodities, and other top profit opportunities in the New Year. Our last forecast focused on currencies.]

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Despite a pullback from its all-time high of about $1,920 an ounce set in September, gold is still trading in the $1,750 range. In fact, the glittering metal has gained 22% in the past 12 months.

What's more is that I believe gold prices will eclipse $2,200 an ounce next year, and shoot beyond even $5,000 an ounce after that.

So there's obviously still time to get in on this once-in-a-lifetime bull-run, if you haven't already.

Of course, every investor should at least have shares of a gold-based exchange-traded fund, but if you really want to profit from the price surge, you ought to look at gold mining companies.

Let me explain.

A Golden Opportunity

While gold prices have surged 22% over the past year, gold mining stocks have lagged curiously behind over that period.

The Amex Gold Bugs Index, a weighted benchmark made up of 16 of the world's largest gold and silver mining companies, began the year at 540, and after numerous troughs and peaks, we're back near those same levels.

Normally, gold stocks will leverage gold on a 2-for-1 basis, but in this case, we've seen miners move sideways as gold has advanced.

Yet with gold's price powering skyward, the gold miners have seen their margins expand, making them very profitable at current levels. That makes them absolute steals at these prices.

You don't have to take my word for it, either. Just look at what industry insiders are saying.

"A substantial disconnect has developed between the price of gold and the mining companies," said David Einhorn of Greenlight Capital. "With gold at today's price, the mining companies have the potential to generate double-digit free cash flow returns and offer attractive risk-adjusted returns even if gold does not advance further. Since we believe gold will continue to rise, we expect gold stocks to do even better."

Portfolio managers Michael Bowman and Allan Meyer of Wickham Investment Counsel Inc. concur.

"We are now finding a large number of gold stocks are hitting our value screens, something that has been unheard of in the past," said Meyer.

What else are experts noticing?

Well, as gold prices have risen and stayed high, the price/earnings (P/E) ratios of gold miners have been cut in half. That means the sector as a whole is at as compelling a value as it's been in three years. And with the price of gold set to rise still higher on the back of incessant money printing in the United States and Europe, these miners are only going to get more profitable.

How high is gold likely to go?

My own research tells me we should expect gold to easily reach $2,200 in 2012.

A few market mavens have been providing their forecasts too.

Sean Boyd, chief executive officer (CEO) of $7 billion Agnico-Eagle Mines Ltd (NYSE: AEM), recently told King World News "people are looking for hard assets and gold, being one of the primary hard assets, is a major beneficiary. So we don't see any reason to believe this upward trend in gold won't continue. I think it will continue and we will see $2,000 shortly."

Rajan Venkatesh, Managing Director, India Bullion, ScotiaMocatta, said he expects gold prices to touch $2,000 an ounce by March.

And this past June, Standard Chartered PLC (PINK: SCBFF) made what some think is an "outrageous" prediction.

The bank's research team considered the production levels of 345 gold mines and concluded production will rise just 3.6% annually for the next five years, while demand expands much faster.

Their price prediction: $5,000 gold is likely in the near future.

That's a price I'm on record as predicting nearly two years ago.

But now, I've changed my mind – because I think it could go even higher than that.

MM Outlook 2012

Top 2012 Profit Plays

So what should you do now to profit from gold's imminent rise?

Here are a few suggestions to play the gold mining stocks that are primed to play catch up:

  • Alamos Gold Inc. (PINK: AGIGF): Alamos is a $2 billion gold miner, operating the Mulatos mine in Sonora State, Mexico. AGI operates one of the lowest cost heap-leach gold mines in the sector, at $459 per ounce. The company expects to boost Mulatos' production by 50% next year, and is working toward producing 135,000 ounces annually at $314 per ounce from its Turkish gold project by 2014. AGI has $210 million in cash and no debt.
  • Eldorado Gold Corp. (NYSE: EGO): Eldorado is a $9.75 billion gold producer with six operating mines, one under construction, and two in development. EGO currently produces about 650,000 ounces annually at $400/ounce. Currently 56% of gold production is from China and 44% from Turkey. Eldorado could double its gold output by 2015 through new mines coming online in Brazil and Greece, and by expanding the production at some of their current mines.
  • The Tocqueville Gold Fund (MUTF: TGLDX): This is a $2.65 billion fund managed by John Hathaway and has a reasonable expense ratio of 1.35%. Its top ten holdings include large-cap and mid-cap miners, as well as some precious metals royalty companies, and about 6.6% in physical gold. The fund does have some exposure to smaller cap miners that provide additional potential for growth.

Besides the fact that gold stocks are set to charge upward, just based on their need to catch up to gold, there's another factor that makes right now an exceedingly bullish time to participate.

On a seasonal basis, we are entering the strongest time of the year for gold stock advances. Over the past decade, the HUI experienced an average of 20% gains from late October until late February the following year.

Gold stocks typically follow gold, which is driven in part by cultural influences.

Many Asian consumers, particularly in India, buy after their harvest season, which is then followed by its festival and wedding season. Then come end-of-year holidays in the West, from Thanksgiving to New Year's. And finally, that's topped off by the Chinese New Year, which usually lands somewhere between late January and mid-February.

Each of these celebrations impels new gold buying, and that has a positive secondary effect on the gold mining sector.

Not only do I expect this trend to repeat again this year, but it's likely to be amplified as gold stocks finally respond to a long overdue bout of catching up.

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About the Author

Peter Krauth is the Resource Specialist for Money Map Press and has contributed some of the most popular and highly regarded investing articles on Money Morning. Peter is headquartered in resource-rich Canada, but he travels around the world to dig up the very best profit opportunity, whether it's in gold, silver, oil, coal, or even potash.

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  1. Gordan Finch | December 9, 2011

    Aurico now on TSX will deliver better, there are market influences suggest NMC will rocket this stock much higher. Northgate Minerals corp were one, and better times will come next May, with expected drilling program results above data at around 730,000 gold equivalent ounces of production for 2013. Long on this.

    • miles Jones | December 9, 2011

      Why is Aurico stock performing so poorly? I thought the Northgate buyout was accretive and naysayers put to rest. Have seen upgrades elsewhere on AUQ.. Got stopped out on it recently.

  2. Cheryl | December 9, 2011

    GDX, NOV
    slw and
    sxl but now I think a fund mix is a good idea as miners as set to rise.

  3. jrj90620 | December 9, 2011

    Great article, that the vast majority of ignorant Americans will never see.If they did see it,it's unlikely you would sway them from believing Dollars are money and the safest investment,while gold is some speculative commodity.

  4. Norman Krasula | December 9, 2011

    What is the future for Great Basin Gold?

  5. RICHARD JENKINS | December 9, 2011

    WHAT DO YOU THINK ABOUT SIERRA GOLD CORP…..SGCP ?

  6. Croesus | December 9, 2011

    Not very likely. Look at the dismal performance and the total absence of leverage to the gold price that reached records this year. We've been promised this moonshot way too long to remain believers in it. IMHO mines will start hedging shortly and they will also see thier margins which are now quite fat narrow to only a few hundred bucks. I would sell on any rally that gets me back into the black.

  7. BRET HOLMES | December 9, 2011

    Dear jrj90620:

    Thanks for the terrific testimonial. And may I at the same time compliment you for some cogent, and candid, observations of your own. I would have to agree with your sentiment.

    Please continue to tune in … and to offer your feedback.

    May you — all of our readers here, in fact — enjoy a great holiday season. And may I wish for each of you … and for your families … a New Year that is safe, happy — and exceptionally prosperous.

    Respectfully yours;

    William (Bill) Patalon III
    Executive Editor
    Money Morning & Private Briefing

    P.S. I'll ask Peter Krauth to take a look at these questions and do a follow-up story next week. Tune in then.

    Bill

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