How Much for the Island?

Investing in gold is often called a “fear trade.” In times of crisis, it’s believed that gold will hold its value, and even rise, while the value of paper currencies and other assets fall.  

If you bought SPDR Gold ETF (NYSE:GLD), which seeks to track the price of physical gold, 2 years ago, you’d be up around 36%.   

The S&P 500 is down around 15% during that time.   

You probably already know that gold hit a new all-time high yesterday at $1,200 an ounce. And even though other traditional measures of fear – like the volatility index (VIX), bonds and even stocks – didn’t move much today, the move in gold can’t be ignored.   

So what are investors afraid of?

The financial media is reporting that investors are skeptical that the EU’s trillion dollar debt backstop won’t work. It’s not really that anyone doubts that $1 trillion can keep any of the indebted euro countries from defaulting. Clearly, that much loot is enough to keep the payments from Greece, Spain and Portugal coming.  

The fear is that the EU’s bold show of monetary force is just that – a show.   

Will that trillion get put into action of the stuff really starts to hit the fan? I think there’s been enough waffling by the European Central Bank and member nations during the Greek debt crisis to make us wonder if the resolve is truly there now.  

But perhaps even scarier than the measure of Europe’s resolve is the perception that both corporate and sovereign debt is ending up being a central bank problem.   

Eventually, there will be no source for new bailout funds. It’s important that indebted individuals, companies and countries get their acts together.   

When companies need to raise cash, they sometimes sell stock in secondary offerings. Maybe it’s time for indebted nations to consider something similar. I mean, Greece has something like 1,400 islands in the Aegean Sea. And apparently only a few hundred of them are inhabited.    

Maybe Greece should consider selling off a few islands to raise a few bucks.   

Anyway, I was getting tired of writing about the Greek debt situation a month ago. And I get the feeling I’m not the only one who is ready to put Greece in the rearview mirror. Perhaps, investors will be ready to move on sooner than we expect.  

Again, keep an eye on gold prices. They will likely be the “tell.” $1,200 is an important level for gold. That level was touched back in December of 2009. And it seems likely that gold prices will move back to test $1,200 again.   

So while physical gold prices may be ready to take a breather, gold mining stocks should be the place to be. And that’s because incremental moves for gold prices can have an exponential impact in earnings for gold mining companies.   

The cost to pull gold out of the ground is a fixed cost. But the sale price for that gold is not fixed. And given the recent move higher for gold prices, earnings and profit margins for the miners are increasing.   

My favorite gold miner right now is a small $180 million company with operations in Latin America. It currently trades with a forward P/E of 6. And earnings estimates have not been adjusted to account for higher gold prices.

But that’s not going to last.  

The stock is up 8% today, after a nice move yesterday. It is being re-priced for higher gold prices right now. It currently trades below $4 a share.      

Now, other gold miners trade with a forward P/Es in the 15-30 range. I’m talking about miners like Aurizon (AMEX:AZK), Agnico-Eagle (NYSE:AEM) and Barrick Gold (NYSE:ABX). 

Clearly, my little sub-$4 could double in price and still be cheap compared to other miners. You can access my Special Report on this stock HERE.