Fund manager and market statistician John Hussman sees bad things on the horizon. He’s been buying gold shares in Hussman Strategic Total Return Fund this year. At the start of the year, his three largest gold positions were Newmont Mining Corp (NYSE:NEM), Barrick Gold Corporation (USA) (NYSE:ABX), and Agnico Eagle Mines Ltd (USA) (NYSE:AEM).
Where we Stand
Every week Hussman writes a commentary about what he is seeing in the market. He is not a prognosticator, he is more of a statistician and historian. He looks at what has happened in the past and tries to see how today rhymes with that history using various math based-measures and techniques.
Here is what he sees: “Matching the valuations of the 2007 peak would require another 8% advance in the S&P 500. A return to historically normal valuations would imply a 48% market decline – the average cyclical bear market in a secular bear market period has typically represented a decline closer to 38%.” Getting to a “secular low,” meanwhile, would require a 75% drop.
Translation: the market could move a little higher or it could fall a lot lower.
While Hussman uses hedging in his funds to protect against such adverse outcomes, he has also been buying gold in his bond fund. Gold will likely be a refuge in any sell off and more so if we see uncontrolled inflation.
The Largest Holding
A continued drop in the price of gold is likely the biggest concern facing Newmont Mining Corp (NYSE:NEM) today. That said, older mines and rising production costs are longer-term negatives to keep in mind.
The longer a gold mine is worked, the less gold it produces. Worse, the ore quality tends to get worse and worse as time goes on, too. This pair of issues leads to lower production and increased costs at the same time.
Newmont Mining Corp (NYSE:NEM) has been investing in new projects to replace its reserves, but these mines have generally been more costly to operate than hoped, including a big project in Australia. Although the company’s domestic operations have been performing well, the cost and reserve issues mean that higher gold prices are the most likely near-term performance catalyst.
The company’s dividend is tied to gold. While the yield is around 4.5% today, the recent drop in gold prices could lead to a dividend cut. That said, if Hussman is correct about the size of an upcoming market drop, higher gold prices, and dividend increases, could be on the way.
The Number Two Slot
Barrick Gold Corporation (USA) (NYSE:ABX) mines gold, silver, and copper. The company’s big issues today are the falling price of gold and the construction of a massive project that isn’t going very well. Barrick Gold Corporation (USA) (NYSE:ABX) can’t do much about gold prices. That makes construction the bigger problem at the moment and it has long-term implications since mines are depleting assets.
Barrick Gold Corporation (USA) (NYSE:ABX) has two notable projects, one in the Dominican Republic that is going well enough and one spanning the border of Argentina and Chile that looks like a complete disaster. Chile ordered construction to be halted because of concerns about the mine’s impact on glaciers. Argentina has the same concerns, though it hasn’t stepped in yet. dust control, meanwhile, is another issue being brought up at the project.
The mine is a huge investment and would materially increase the company’s access to and output of gold. Delays are a big problem, but a complete closure would be a huge setback. This on top of the volatility in gold has left Barrick Gold Corporation (USA) (NYSE:ABX) trading lower. That said, news is more likely to drive the stock than fundamentals right now. Barrick Gold Corporation (USA) (NYSE:ABX) sports a yield of over 4% and has been increasing its distribution in recent years.
Pulling up the Rear
Agnico Eagle Mines Ltd (USA) (NYSE:AEM) produces gold, silver, zinc, and copper. It’s most valuable assets are in Canada and operate with very low costs. That’s the good news. Newer investments, however, have encountered problems.
The list of negatives at new properties includes operating in hostile weather environments and mine disasters. Costs are more likely to head higher over the near term than lower. However, so long as gold prices remain elevated, the company has plenty of time to get its house in order.
Meanwhile, with an over 3% dividend yield, investors can benefit from a miner that has been able to increase its output about four times over in the last five years. That underlying growth is a notable positive for those seeking a longer-term gold investment.
A Safe Haven
Gold is a safe haven investment. If Hussman is correct about the downside risk in the market, now might be a good time to consider gold miners. Barrick is probably the riskiest option above based on its construction troubles. Agnico Eagle Mines Ltd (USA) (NYSE:AEM), meanwhile, appears to have the best underlying business.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article Golden Dividend Ideas From A Bear originally appeared on Fool.com is written by Reuben Brewer.
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