One of the biggest rallies of 2011 was the gold market. Mainly because of its perceived ability to store value, gold more than doubled in price, as investors saw volatility levels go through the roof.
The end result has been a massive increase in the price of gold, as well as a massive expansion of the gold production lines. Producers have are now making excellent margins on their product, and are investing it into aggressive expansion to meet the new demand.
The market seems to be more interested in investing in the physical gold itself, as opposed to the producing companies. Combined with the tendency of gold producers to dilute out shareholders to finance a faster expansion, shareholders of gold producers have not yet seen the benefits passed along. However, there is still a fantastic opportunity present to cash in on the expansion that is being fuelled by the discrepancy.
As mentioned above, one of the biggest reasons why gold producers have not yet appreciated to reflect the price of gold is because the companies are diluting investor positions at the same rate as the growth of the shares, in order to finance further growth. While this limits an investor’s short-term returns, it provides opportunities for even greater returns in the future, as the company is now better able to get new production online.
This means that the producing company is able to get new volumes in-stream faster, and realizing the high margins to today, as opposed to the potentially lower prices of tomorrow. Assuming that this gold boom is going to stay for the short-medium term, there is a great deal of profit to be had in reconciling the future sales to today.
The second reason why gold producers are an excellent hold for 2012 is because of the way in which the market has not yet appreciated the fact that their revenues are growing extremely quickly, while their costs are not. As the companies continue to sell more and more gold at these record high levels, their cash balances build up, and they gain value as an investment extremely quickly. Soon enough, these funds will be forced to apply these massive cash build-ups towards dividends or expansion, both of which being excellent catalysts for spurring market appreciation.
The end result?
Sudden and very large returns to the investor from re-imbursement, and appreciation from the rush to collect the new dividend. Remember, dividend growth is worth more than a stable dividend. This means that a company growing their dividend from $0 to anything is worth a great deal inside a personal portfolio, because it allows you to benefit from the shift to a stable income.
