The Key Reason to Buy Gold Stocks Now

By: Money_Morning

Tony Daltorio writes: One of the most successful long-term strategies when hunting for the best stocks to buy is contrarian investing.

It's a rather simple strategy: buy something when it is out of favor and everyone else is selling, which leads to bargain prices. Then wait for sentiment to turn, sell and pocket your profit.

Many contrarian investors are taking a long, hard look at one particular sector: gold miners. This is a sector that has not only been battered by falling prices for the gold they mine hurting profitability, but also a sector plagued by poor management at many companies.

But a closer look shows why some of these miners are among the best stocks to buy now when prices are low and potential is soaring.

The Best Stocks to Buy Now

Brenton Saunders, who helps manage about $600 million for Taurus Funds Management in Sydney, Australia, told Bloomberg News, "Gold companies have underperformed the gold price for more than the past 20 years, quite simply because they make as little money today for shareholders as they did at $300 an ounce."

An unpleasant mixture of circumstances has led to most investors shunning the sector entirely. A few weeks ago, Bloomberg said that gold stocks were trading at the lowest level relative to gold prices in at least 20 years.

Frank Holmes of U.S. Global Investors, in a recent Money Morning article, added that gold stocks were trading at bargain basement levels on a price-to-cash-flow-basis. Current valuations haven't been this low on that basis since 2001.

All of this is music to a contrarian's ear!

The selloff in gold stocks certainly caught the attention of Money Morning Global Investing Specialist Martin Hutchinson. Last week, he called the gold mining sector the best sector to invest in right now.

Hutchinson pointed to global central banks' continued low interest rate and money printing policies as pushing fiat currencies down and gold up in the long-term.

A Key Reason to Buy Gold Stocks Now

And there are even more reasons to buy gold stocks...

One is that at many gold miners, the old management has been given the boot and new management brought in. The new management teams seem to have a keen eye for the bottom line and treating shareholders well.

Managements used to make acquisitions and invest in low-grade gold projects just to add reserves. But the new management teams have a new focus.

Standard Bank analyst Peter Davey summed it up this way for the Financial Times, "[Now] boards are looking to regain investor confidence - that they can return cash and not pour it down another hole just to chase growth for growth's sake."

This change in tactics makes sense in the light of rapidly rising mining-related costs.

The last handful of years has seen gold mining costs rising at an alarming rate of roughly 17% a year, according to Earth Resource Group's Georges Lequime. Newmont Mining, for example, saw its costs surge 40% between 2010 and 2012. Its all-in sustaining cost is now $1,115 an ounce.

Lequime says the key factor in the rising costs has been the gold companies pursuing very-low grade projects, with the average across the industry now under 1 gram per ton.

This trend is clearly unsustainable. Lequime says that if the trend of the past five years would continue, costs could rise to $2,000 an ounce within 10 years.

Finally though, gold miners' managements are getting the message and cutting back on sinking money into unprofitable projects.

Lequime is another analyst that thinks the recent management changes are significant and shareholders will benefit. He said, "I don't think we're going to go through as poor a period as we have in the past 10 years."

It is this poor past ten years that has investors turned off and made the sector so unloved and cheap.

Gold Stocks to Buy Now Offer Dividends

Another reason to buy gold stocks is again part of companies' management new-found friendliness toward their shareholders. Gold mining companies are raising dividends, increasing the amount of cash returned to stockholders.

The yields on many gold stocks are becoming more than competitive with the 10-year Treasury yield of about 1.5%.

According to Frank Holmes, the companies in the Philadelphia Gold and Silver Stock Index (XAU) are paying more than 1% higher than the 10-year Treasury. This compares to 2008 when the 10-year Treasury yielded 3% more than the XAU index.

Keep in mind too that gold companies are becoming more and more interested in being shareholder friendly and raising their dividends. It is quite unlikely Ben Bernanke will become more "yield-friendly" to investors searching for income.

Martin Hutchinson and Frank Holmes are right. . .gold stocks are a buy right now.

But don't just buy any gold stock. Look for companies that are increasing dividends and reducing costs while maintaining or increasing production. These gold miners will reward shareholders long-term.

Read more on why Hutchinson calls gold miners "The Best Sector to Invest in Now."

Source :http://moneymorning.com/2013/05/16/why-these-are-among-the-best-stocks-to-buy-now/

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