Despite fears of a market crash which helped to boost the gold price over recent months, the precious metal has plunged lower in recent weeks because of a resurgent U.S. dollar. This now sees gold down 12% for the last year to now be trading at $1,155.60 an ounce, its lowest point since April 2010. These new lows now have the bears growling, with popular consensus among analysts being that gold prices will fall further as the U.S. economy and dollar continue to strengthen.
But there are some who are calling this level as gold’s new bottom and see the potential for a rally in the near term. This is despite the physical demand for gold continuing to soften because of falling demand from the world’s top gold consumers China and India.
Let me explain why.
Firstly, there are signs the global economy is not as strong as initially thought with industrial activity in China for October declining for the fourth consecutive month. There are also fears of a weaker German economy leading the Eurozone into a triple-dip recession.
The weaker global economic outlook coupled with rising macro-economic volatility certainly highlights the risks facing investors and the need to hold investments which are a hedge against economic uncertainty. One of the best assets is gold because its value is negatively correlated to growth assets like stocks, real estate and commodities, which perform well during periods of strong economic growth.
Secondly, another factor indicating a rally is imminent is at current prices gold is now close to the cost of production. This will see gold miners forced to halt production if the price of gold falls lower and remains depressed for a sustained period, shortening supply growth and acting as support for the gold prices.
Wall Street continues to make big bets on gold using it as both a hedge in investment portfolios as a hedge against uncertainty as well as making some big bets on a rally. Major institutional investors including George Soros, John Hussman, and Ray Dalio have amassed considerable positions in a range of gold stocks.
This includes Goldcorp Inc. (TSX: G)(NYSE: GG), where Soros holds a stake valued at US$8.4 million, Hussman US$5.7 million, and Dalio $9.8 million. Soros and Hussman also hold significant positions in Barrick Gold Corp. (TSX: ABX)(NYSE: ABX) totaling US$5.9 million and US$25 million respectively.
I believe the best bet for investors seeking a hedge against uncertainty in their portfolios coupled with the ability to cash in on a rally in gold is offered by Goldcorp. Like all of the miners it offers investors leveraged exposure to the gold price, which gold bullion or an exchange traded fund like the SPDR Gold Trust (NYSE: GLD).
It also stands out for three clear reasons.
First, it has built a fortress balance sheet with US$376 million in cash coupled with a very low degree of leverage with a conservative debt-to-equity ratio of 0.16. This is far lower than the more heavily indebted Barrick Gold which has a debt-to-equity ratio of 0.8. This leaves Goldcorp well placed to weather any further softness in the gold price and weaker industry fundamentals, while being able to more effectively capitalise on a rebound.
Second, Goldcorp is one of the lowest cost gold producers with third quarter all-in sustaining costs of US$1,066 per ounce produced. This has risen compared to the second quarter 2014 by 25% and against the comparable period in the previous year by 7%, primarily because of the carrying value of its low-grade stockpile at the Peñasquito mine in Mexico.
But I expect to see these costs fall with Goldcorp actively implementing a range of cost initiatives, which should see it realise its forecast full-year all-in-sustaining-costs of between US$950 and US$1,000 per ounce.
Finally, Goldcorp holds a diversified portfolio of projects with reserves of 54 million ounces of gold and 818 million ounces silver, along with considerable quantities of copper, lead, and zinc. This leaves Goldcorp well positioned to benefit from a broad-based rally in precious metals, particularly with silver trading at its lowest price since February 2010 and offering considerable potential upside.
