On the back of QE3, commodities are sure to have an illustrious future, with gold having the potential to lead the way. Gold has largely served as an inflation hedge, with investors more recently using it as a way to make money, by betting on Ben Bernanke and the Fed’s attempts to jump-start the economy. As a third round of monetary easing became more of a reality, the CBOE Gold Index rose with its prospects, gaining 11% in the past month alone.
One fund manager, John Paulson of Paulson & Co., does appear to believe in the potential for QE3 to cause currency debasement and inflation. Like all gold bulls, Paulson likely supports the notion that future concerns over solvency of international debt defaults will only further drive the appeal for gold as a safe haven. Paulson also likely has the belief that gold could return to a price north of $1,900 per ounce.
Outlined below are a few of Paulson’s top gold picks. Worth noting is that Paulson prefers a mix between bullion and gold diggers. Paulson had 28% of his 2Q 13F portfolio invested in the gold ETF – SPDR Gold Trust (NYSEARCA:GLD), but also owned variety of mining companies.
GLD is the second largest ETF in the world. Paulson has some prestigious company as fellow investors, namely Stephen Mandel of Lone Pine Capital, and George Soros; the latter had 2% of his 2Q 13F holdings in the ETF - an increase of 177% from 1Q. See all funds owning this gold ETF here.
The first gold miner on Paulson’s list is Anglogold Ashanti Limited (NYSE:AU), which Paulson had 9% of his 13F portfolio invested in. AngloGold’s production for 2Q came in at 1.073Moz, which represents a 9% improvement on the first quarter, at an estimated total cash cost of $800-$805 per ounce. The result is better than the company's market guidance for the quarter, which was 1.04Moz at a total cash cost of $840-$845 per ounce. The company’s South African operations also improved over the period, and were 18% higher than the first quarter of 2012. The company gave guidance for second quarter earnings between $240 million to $255 million. As of the end of 2Q, Jim Simons was also an Anglogold owner, owning 2.3 million shares, up 86% from 1Q.
Gold Fields Limited (NYSE:GFI) is engaged in gold mining and related activities. Gold Fields recently saw an upgrade from Bank of America, but the company has had strikes at one of its South African mines, and is down 15% year to date. Gold Fields is expected to grow EPS by 10% this year and 18% next year. The company trades at a trailing P/E of 10 and a forward P/E of 7. Jim Simons was also invested in Gold Fields, owning 5 million shares. At the end of the second quarter, Paulson owned 18 million shares and had about 2% of his 13F portfolio invested in Gold Fields.
Barrick Gold Corporation (NYSE:ABX) reported adjusted 2Q net income of $784 million or $0.78 per diluted share, down from $1.12 billion or $1.12 per share in 2Q 2011. EPS fell short of consensus forecast of $0.95. The decline in second quarter earnings was primarily attributable to lower overall gold production and higher operating costs, which had been anticipated. Barrick’s equity gold production was 1.74 million ounces at an average realized price of $1,608 per ounce, compared to 1.98 million ounces at an average price of $1,513 per ounce in 2Q 2011. 2Q total cash costs rose approximately 37% year over year, to $613 per ounce, due to higher operating costs. Vinik Asset Management became the top fund by shares in 2Q by doubling their 1Q position, and Jim Simons upped his over 70%.
Randgold Resources Ltd. (NASDAQ:GOLD) is expected to increase revenues 28% this year; this follows a 123% advance in revenues in 2011. Production increases are expected to drive revenues higher, with 828,923 ounces expected in 2012, up from 696,023 in 2011. The company met expectations for 2Q EPS, posting $1.26, versus $1.25 estimates. Randgold trades at a trailing P/E of 26 and a forward P/E of 18. Other investors in Randgold include Royce & Associates, who upped their stake by 40% in the second quarter, and Jim Simons, who upped his by 20%.
IAMGOLD Corporation (NYSE:IAG) maintained its 2012 guidance of 840-910 thousand ounces at $670-$695 per ounce in total cash costs. IAMgold reported 2Q EPS of $0.20, matching estimates, but is expected to grow EPS next quarter by 3.4% over the same quarter last year. IAMgold trades at a trailing P/E of 18 and a forward P/E of 10, and is flat so far year to date in terms of stock price performance. Again, Jim Simons was upping his 2Q stake, this time by 60%.
Investors can always go the route of building an ETF based gold portfolio, or they can go the Paulson route, building a portfolio with a mix of bullion – using the GLD ETF – and mining companies. It's important to keep in mind, though, what Warren Buffett has said in the past: that bullion produces no income, but gold miners, like any other business, seek out profit-making opportunities.
Four of Paulson’s picks also made our list of ten gold miners that pay a dividend. Each of these companies pay a dividend less than 2%, except Gold Fields, which pays a dividend that yields 3.7%.
Comparing the companies on a valuation basis, Gold Fields has the highest dividend and trades at the lowest P/S of all its peers. Gold Fields trades at a 1.6 P/S, while Randgold is the highest at 9.0x, then IAMgold at 3.6x, Barrick at 2.9x and AngloGold at 2.0x.
For a complete look at John Paulson's 13F holdings, continue reading here.