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Invest in Gold Mining Stocks While They're Still a Bargain

By , Money Morning -

With gold prices high and likely to go higher, this might be the best time to invest in gold mining stocks.

Gold prices eked out a small gain Friday to close at $1,616.30 an ounce.

Comments from German Chancellor Angela Merkel Thursday supporting European Central Bank President Mario Draghi's crisis strategy to do "whatever it takes" to save the euro helped push gold prices higher.

More disappointing U.S. economic news in manufacturing and housing starts could also boost the yellow metal. The more the U.S. economy struggles, the more likely the U.S. Federal Reserve will launch another stimulus program that would favor higher gold prices.

For some investors, this adds to their dilemma of whether to invest in physical gold or gold equities.

History is on the side of physical gold. Citigroup Inc. (NYSE: C) has found that in the last five years, physical gold has outperformed global gold stocks by 120%.

But because gold stocks - and gold mining stocks in particular - have lagged gold prices, they have a lot of upside potential.

What's more, gold mining stocks offer something in return - dividends - in addition to benefiting from a continued rise in gold prices. Many commodities experts think gold prices could reach $2,000 an ounce or more within the next six months.

While not quite in bull mode, gold mining stocks have begun to stir of late. Here are three gold mining stocks worth a look for gold equity investors.

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Gold Price Outlook 2012: Miners Will Shine as Prices Soar

By , Money Morning -

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.



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