Goldcorp Inc. (TSX:G)(NYSE:GG) is one company that many investors and analysts hate. Moving largely on the whims of the spot price of gold, this is a volatile stock that can make an investor look like a hero one year and a fool the next.
To remain Foolish on this stock, however, I suggest that a long-term investor take the following points into consideration, following Goldcorp’s announcement of its Chilean joint venture with Barrick Gold Corp. (TSX:ABX)(NYSE:ABX).
First, holding a nominal amount of gold in your portfolio is a prudent idea. From the earliest investment gurus (think Benjamin Graham) to modern day hedge fund managers and activist investors, gold often plays a small but meaningful role in portfolio management as a form of risk management or hedging.
Whether buying a gold mining company, such as Goldcorp or Barrick, purchasing a gold ETF, such as SPDR Gold Trust (ETF) (NYSE:GLD), or buying the “real thing” and putting some bouillon away in a safety deposit box, having gold as a percentage of your portfolio is a smart inflationary (or deflationary) hedge in good times and in bad.
Second, the play made by Goldcorp to develop three more mines in the Maricunga region of Chile may be, in hindsight, a very smart play down the road. Should gold prices continue to rise to its highs or perhaps break resistance and move to new records, this investment at today’s levels, with gold prices depressed around $1,250 per ounce (up from 52-week lows below $1,150 per ounce), may seem prudent.
The rise or fall in gold prices is linked to the price companies are willing to pay to acquire assets. In today’s environment, both Goldcorp and Barrick may be getting a steal at current market levels. At a cost estimate of approximately $445 million to develop the assets in Chile, the price is certainly not rock bottom, but all things considered, it may turn out to be adequate should management turn these stagnant assets into free cash flow producing assets in the short to medium term.
Timing the price of gold is not something the average investor should attempt (and most investment gurus would advise against such action). Instead, taking a long-term perspective and acknowledging the value a small portion of gold can have for a portfolio can go a long way in serious market corrections or adverse scenarios.
In the famous words of Warren Buffett, “When others are fearful, be greedy. When others are greedy, be fearful.”
Stay Foolish, my friends.