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The Best Gold Play in Today’s Market

The price of gold continues to hit new 52-week highs, and is now close to $1,350 an ounce.

I wrote about making a bet on gold at the end of last year when Stanley Druckenmiller was making a huge bet on the SPDR Gold Shares (NYSE: GLD). Since then, the GLD has outperformed the S&P 500.

Gold is still a long way off from the near-$2,000 an ounce we saw in 2011. However, mixed signals are filling the air. Many of the top-named hedge funds have been dumping their gold stakes. George Soros did the same.

Soros, who’s semi-retired, jumped back into the markets earlier this year with a big bet on gold. But he’s now dumped his gold bet.

JANA Partners, ran by Barry Rosenstein, sold all of its GLD shares. John Paulson, who’s been a notable gold bull in the past, sold off stakes in AngloGold Ashanti (NYSE: AU) and NovaGold Resources (NYSE: NG).

Gold Still Has Tailwinds

What’s interesting is that the same hedge funds that have been paring back their gold bets are still bearish on the economy. Soros more than doubled his bearish bet on the S&P 500. An economic pullback would be good for gold.

Bottom line: There’s still value to be found in gold. The stock market is still near all-time highs, which suggests there is little upside for the stock market from here. Gold is a great bet on fear and uncertainty, which we could see more of ahead.

And despite the slowing demand for gold by hedge funds, others are still buying it up. The World Gold Council shows a record demand for gold during the first half of 2016. And it wasn’t jewelry that was the largest source of demand, rather it was investment. This is the first time ever that investment was the biggest component of gold demand for two straight quarters. Gold prices are expected to hit $1,400 by the end of 2016 and then $1,500 in 2017.

Best Gold Play Today

Instead of betting on just the price of gold, investors can take some of the uncertainty out of gold price volatility by investing in gold miners. As gold prices continue to move higher, the gold miners will also gain.. But gold mining companies  also have some downside protection as they can cut costs and reallocate resources.

The best bet on the gold miners is Barrick Gold (NYSE: ABX). Barrick had a great run for the first part of the year, but it’s still got plenty of room to move higher.

Shares of Barrick traded upwards of $40 a share four years ago – 100% upside from here. And while Stan Druckenmiller has been cutting his stake in gold, with his Duquesne Capital selling its entire GLD stake last quarter, the fund still owns its 1.8 million stake in Barrick Gold.

Barrick has been hit harder than many of the other miners over the last few years as it took on sizable debt load to make acquisitions right before the bottom fell out of gold prices in 2011. However, the beauty of Barrick is that its cost of producing an ounce of gold remains well below most miners.

Right now, Barrick’s all-in sustaining cost to produce an ounce of gold is under $800. Its core mines, which include five mines that account for nearly three-quarters of its production, have an all-in sustaining cost of under $700 an ounce. Barrick has plans to further reduce mining costs with new mining process improvements.

In the end, gold will continue to be an interesting asset as long as global growth remains uncertain. And as the Fed remains cautious about raising interest rates, gold will remain in favor. The best bet for investors looking for exposure to gold is the miners, and the best miner around looks to be Barrick.

 

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