The gold industry has been in a bull market for close to ten years as rates have been in a steady slide. As interest rates are now at rock bottom lows, and expected to remain that way through 2015 per the Fed, the question becomes: how much higher can gold prices go? In the current low-rate environment, we place gold as a safe-haven investment as investors look for stability and inflation protection. We believe that Paulson’s top five gold picks will see strong sales and growth as a result of increasing demand for gold. Also bolstering a continued upward trend for gold prices will be continued uncertainty in international markets, such as Europe, where the threat of defaults make gold an even more attractive safe haven.
Anglogold Ashanti Limited (NYSE:AU) is Paulson’s 2nd largest 13F holding and largest stock holding. At 11x earnings, Anglogold would appear to be a solid buy with its historical P/E being north of 13x. Billionaire investor – and founder of Renaissance Technologies – Jim Simons is one of the top fund owners of Anglogold (see Jim Simons’ top picks).
Novagold Resources Inc. (NYSEAMEX:NG) is Paulson’s second gold pick and 14th largest 13F holding. Billionaire Steven Cohen – founder of SAC Capital – is also a fan of Novagold and increased his 2Q stake over 175% (check out Steven Cohen’s newest picks).
Gold Fields Limited (NYSE:GFI) pays a 4.4% dividend yield – the highest dividend of Paulson’s top five gold stocks. Randgold Resources Ltd. (NASDAQ:GOLD) makes up Paulson’s fourth gold pick and is his 22nd largest 13F holding. Randgold recently saw production shortfalls and is down 15% over the last month. Iamgold Corporation (NYSE:IAG) pays the second largest dividend yield – at 2.4% – of Paulson’s five gold stocks. Iamgold is seeing a slowing of its production, with 2013 guidance recently being revised downward – production is now expected to be down 13% from 2012.
Assuming investors would rather not have to invest in all five of Paulson’s gold picks, we decided to dig deep to uncover the best investment opportunity. Below is a summary of some key market data for Paulson’s gold stocks:
| Ticker | P/E Ratio | P/S Ratio | Dividend Yield | Net Profit Margin | Return on Equity | Debt-to-Equity |
| AU | 11x | 1.8x | 1.9% | 24% | 22% | 0.6 |
| NG | – | – | – | – | 17% | 0.6 |
| GFI | 9x | 1.4x | 4.4% | 17% | 14% | 0.2 |
| GOLD | 22x | 7.6x | 0.4% | 39% | 19% | 0.0 |
| IAG | 11x | 2.4x | 2.3% | 26% | 13% | 0.0 |
From this data we see that Gold Fields is the cheapest in the industry, but for good reason, given its subpar profit margin and ROE. Worth noting is that Gold Fields does pay a very robust 4.4% dividend yield.
It sounds like a self-fulfilling prophecy that Paulson’s number one stock pick, Anglogold, is our pick for his best gold stock. In reality it was a close battle between Anglogold and Randgold. Randgold offers the best growth opportunities, but its out of line valuation should cause hesitation for investors. Randgold trades at a P/E and a P/S that is well above the other four gold stocks, but without offering investors an extraordinary ROE.
Anglogold has one of the more robust ROEs and pays a solid dividend. The other great equalizer is Anglogold’s diverse operations. Anglogold has twenty separate operations that span ten countries and four continents. Randgold’s gold operations are only in the volatile continent of Africa. Other gold miners also have much more concentrated operations when compared to Anglogold. Iamgold only runs five operations that span Africa and South America, and Novagold is focused in the United States. Gold Fields is a bit more diversified with operations in South Africa and Australia, and an almost 20% interest in its fellow gold miner Iamgold.
For the past five-year and three-year periods, miners have generally underperformed gold as a commodity. Below are the returns of Paulson’s five gold stocks compared to the SPDR Gold Trust.
| Investment | 5-Year Return | 3-Year Return |
| SPDR Gold Trust – GLD | 110% | 44% |
| Anglogold | -34% | -32% |
| NovaGold | -78% | -14% |
| Gold Fields | -36% | -23% |
| Randgold | 165% | 23% |
| Iamgold | 19% | -43% |
Randgold appears to track gold – as measured by the SPDR Gold Trust – the closest and is the only miner up over both a three and five-year horizon. Year to date, GLD is up 8% and Randgold is relatively flat, but Anglogold is down over 20%. The question is: when will investors see a turning point where miners begin to better reflect the commodity’s performance? When owning the miners, investors are still dependent on gold’s spot price, but are also investing in management’s ability to hedge, and the company’s ability to operate efficiently.
We believe that the bull market over the last 10+ years has been exacerbated by the fact that miners have maintained a low level of production. We see increasing demand leading to a higher-level of production, which should help drive the miners to what might result in an outperformance of the commodity. Although Randgold has tracked the commodity the best over the interim, we remain cautious given its concentrated and limited operations – Randgold’s 2011 gold production came in around 700,000 ounces, while Anglogold produced over 4 million ounces – and believe that to better tap the growth potential provided by owning mining stocks, investors should consider Anglogold.
