When the Federal Reserve dropped key interest rates yesterday, it may have been the proverbial straw that broke the dollar’s back. Since August, the greenback has rallied. As the market has taken a beating, the dollar has been crushing most major currencies. Except for a dip in September, the U.S. currency has been one of the strongest on the planet – a welcome change for strong-dollar advocates.
Gold “Reflating” as Dollar Falls?
Just as oil took a precipitous fall from its peak in recent months, the dollar may prove to have been too strong for its own good. An influx of Fed cash along with billions of dollars from the TARP, could not keep the dollar high for long. In fact, we may be witnessing a ‘reflation’ of certain asset prices as you read this. One asset looks to benefit more than many others on the market: gold.
Typically, gold has an inverse relationship with the U.S. dollar. The logic goes – gold has a relatively stable value – there’s only so much gold in existence. However, the Fed can pump out $100 dollar bills as quickly as the Bureau of Engraving and Printing can order paper and ink. The more money they create, the more dollars it takes to buy gold. It’s simple economics. It appears the “gold-dollar logic” works in this market.
How To Buy Gold
How can you capitalize on a gold move? There’s a few ways to do it. For one, you can order actual bullion. For instance, you could respond to a gold-coin infomercial on TV. We admit, there’s a certain allure to buying gold you can hold in your hands. Second, you could buy a gold ETF. SPDR Gold Trust (GLD) is an economic and convenient way to own gold. Then there are gold mining companies. How to pick one of those is an art. However, we think we’ve found one worth considering.
Goldcorp, Inc. (GG) is a Vancouver, Canada-based gold producer. Goldcorp is one of the largest gold mining companies in the world with operations primarily in Mexico, Canada, and the United States. It’s the 2nd largest producer measured by market capitalization.
Why Goldcorp Is Special
Goldcorp is unique in their industry because they have the lowest cost of production among their major competitors. They can produce one ounce of marketable gold for $163 thanks to leases and relationships mostly in NAFTA countries. With Gold prices rocketing as high as $882 an ounce today, Goldcorp stands to make a big markup when they sell their final product.
Other reasons include the stability of the company. Goldcorp production facilities are located entirely in the Western hemisphere. They’re relatively safe and enjoy the protection of developed nations, especially those in North America. Goldcorp is currently considering a $199 million power plant in Mexico to run operations for one of their largest mines – a sign they’re interested in sustained production in Latin America. Goldcorp has also paid a monthly dividend for the past 4 years while other companies were cancelling their dividend. Moreover, Goldcorp is an unhedged producer. In other words, if gold rises, Goldcorp should profit relative to the price of gold. This makes it a perfect stock to buy when looking to play a rise in this precious metal.
The GG chart shows a bottom in October with a jump into a trading range throughout November. However, on 12/11 – the same day the dollar collapsed – GG jumped out of congestion. It has since gone higher nearing $33+. We don’t expect Goldcorp to be hanging out at this price for long because it shows tremendous upside momentum. However, the $28 previous resistance level (and now support) can always be tested if a quick “back and fill” move occurs. Limit orders could be used if you take a partial position today and hope to fill the other half at a lower price. To go with a hot gold stock as the dollar falls, buy Goldcorp.
All the best.
