Global Conflict? Invest in Gold Mining

gold-miningGold is one of the major proxies for fear.
No one likes global conflict, but when it’s on the rise, gold prices tend to increase. Investors flock to safety, and gold is considered the ultimate safe haven.
Global uncertainty does seem to be climbing. There’s the conflict in Ukraine, sanctions on Russia, the Israel-Gaza conflict, and the battle in Iraq, to name a few.
As billionaire investor Warren Buffett has famously said, “Gold is a way of going long on fear, and it has been a pretty good way of going long on fear from time to time.”
But what’s the best way to invest?
Over the last year, the SPDR Gold Trust ETF (NYSEACRA: GLD), which tracks the price of gold, is down 2%. In contrast, three top gold mining companies we’re discussing today have managed to outperform the commodity over this same time period.
Buffett has said, “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”
However, with gold mining companies, you’re buying into actual companies with assets.
The gold mining business also has an economic moat; Buffett is a big fan of that concept. Basically, an economic moat is a competitive advantage.
Gold mining’s economic moat lies in the fact that it’s a very capital-intensive business. It takes large sums of money to explore and mine gold deposits.
Beyond the rise of global crises, the key for the major gold miners going forward is that the supply of gold might be in decline, which could help push prices for the commodity higher. The global mine production of gold only increased at an annual rate of 1% from 2003 to 2013.
With this, the major gold mining companies with established reserves and mines will be front and center when the time comes to increase output.
Here are the top three stocks to own as global uncertainty rises:

Gold Mining Stock No. 1:  Randgold Resources (NASDAQ: GOLD)

Randgold explores for and mines gold in West and Central Africa. Being an Africa-focused miner, many investors are hesitant given the geopolitical risks. However, Randgold has been a perennial outperformer. Its stock price performance has managed to beat the SPDR Gold Trust ETF over the last three-, five- and 10-year periods.
The company has done a stellar job of generating industry-leading returns. Over the last five years, it’s managed to grow sales at an annualized 27%. Its profit margin is well above most miners at 26% (for the trailing 12 months).
The other beauty behind Randgold Resources is that it has virtually no debt. Its valuation is reasonable, with shares trading at a P/E (price-to-earnings) ratio of 18.2 based on next year’s earnings estimates.

Gold Mining Stock No. 2: Barrick Gold Corp. (NYSE: ABX)

Barrick Gold is the world’s largest gold company by production and reserves. It’s very much a global miner, with just over half its reserves in North America, 40% in South America, and just around 10% in the Australia/Pacific and Africa regions, each.
Barrick’s newest strategy is to reduce costs. It has sold off or disposed of over $1.3 billion in assets since the start of 2013. This is part of its plan to reduce its debt load, with the goal of getting its net debt (debt less cash) to below $7 billion. Barrick’s net debt currently stands at $10.7 billion, which is below its peak of $13.7 billion in mid-2013.
What’s more is that it has no major debt maturities through 2021. With the help of headcount reductions and cutting overhead expenses, it plans on saving roughly $500 million annually by the end of 2014. On a P/E ratio based on next year’s earnings estimates, it trades at 15, the lowest of the three gold-mining companies here.

Gold Mining Stock No. 3:  Goldcorp Inc. (NYSE: GG)

Goldcorp is another major mining company, with a market cap of just over $20 billion, which is right around the size of Barrick Gold. Its gold production is all in relatively safe regions of the Americas; its key mines are located in the U.S., Canada, Mexico and the Dominican Republic.
Goldcorp offers a 2.2% dividend yield, which is a full percentage point above the 1.2% industry average yield. With an 8% long-term debt-to-equity ratio, Goldcorp has a solid balance sheet. The industry’s average long-term debt-to-equity ratio is closer to 40%.
Goldcorp is focused on reducing costs. Its operating margin for the trailing 12 months is just above 7%, but it’s still well below the 40% it managed during the year-earlier period. The miner trades at a P/E of ratio of 25 based on next year’s earnings estimates, but its P/B (price-to-book) ratio is 1.15, which is below the gold-mining industry average of 1.4.
All in all, in times of economic uncertainty and global conflict, gold prices tend to rise. What’s more is that all three gold miners above remain unhedged, thus, as gold prices rise they will be able to sell their gold at an even greater profit. All three are great ways to play the potential rise in gold prices.

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